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How Do I Analyze a Stock?

How Do I Analyze a Stock?

Trading for beginner - How Do I Analyze a Stock

Should I use Technical Analysis?

Technical analysis means looking at past data from a stock chart to predict the future price. Unfortunately, using technical analysis alone is often practiced by traders rather than investors. However, this does not exclude the validity of technical analysis as a measure to properly invest in stocks. On the contrary, long-term investors often use fundamental analysis, and are willing to invest in stocks and accumulate wealth by assessing the longevity of your investments for retirement, which can be difficult. Still, long-term investors often use fundamental analysis for extended periods to help predict volatility and market sentiment. Technical analysis is not as simple as just looking at a chart. In addition to charts, investors practicing technical analysis also use averages and complicated formulas to assess support resistance levels. These levels can tell the investor more about a stock’s price action, also known as ‘the movement’ of a stock’s price.

Should I use Fundamental Analysis?

Investors should always be keen on receiving as much information about a company as possible, often referred to as fundamental analysis. Investing in a company should, first and foremost, always come with a general understanding of what the company is doing, what sector it’s in, and how its business model functions. It is also essential to understand the business’s industry so you can benchmark your investments to related companies. If you invest in a company through your broker, you usually invest in a public company. They are obliged to publish profit and loss statements, cash flow statements, and balance sheets annually. Public companies also publish earnings each quarter which usually causes volatility in the market. When looking at these statements, it is essential to understand the revenue, costs, growth, and sales, to ultimately calculate intrinsic value. In addition, it can help to read the 10k of a company, which is considered the most comprehensive summary of how a company is performing and creates a critical expectation for a company’s future. The future of a company depends highly on debt levels. Companies with high debt are less likely to have sufficient cash flow, and low cash flow can result in problems during a crisis due to cash flow drainage and liquidity problems. However, certain factors are considered silent killers in investing, for example, shares outstanding. When a company is issuing more shares, they are diluting your share in the company. So, let’s say a company issues ten shares, and you buy five; you own half of the business. However, when they issue 5 more shares and sell to others, your stake in the company has decreased. As a result, stock dilution causes inevitable drops in price. Contrastingly, a buy-back program where companies increase your stake in a company is beneficial for a stock price.

Should I use technical or fundamental analysis?

We believe both strategies are viable to analyze stocks effectively. Still, fundamental analysis illustrates a more in-depth picture of how a company performs. Fundamental analysis is the superior analysis for long-term investments. Technical analysis remains interesting for traders. Still, traders are often more interested in short-term price action to turn a quick profit.
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