There are two methods available for selecting stock.
These are
Fundamental Analysis
Fundamental Analysis
Fundamental analysis is the analysis of a stock on the basis of core financial and economic analysis to predict the movement of stocks price.
The fundamental information that is analyzed can include a company's financial reports, estimates of the growth, industry comparisons, and economy-wide changes, changes in government policies etc.
Some people believe that the movement of the stick price can be predicted by analysis of chart of price and volume movement. While other group not believe on this and follow only fundamental analysis.
On the other hand, technical analysis is the study of prices and volume, for forecasting of future stock price or financial price movements.Let we discuss how to do fundamental analysis.
The market price of a stock tends to move towards it's “real value” or “intrinsic value”. If the “intrinsic/real value” of a stock is above the current market price, we would buy the stock because we know that the stock price would rise and move towards its “intrinsic or real value”
If the intrinsic value of a stock is below the market price, we would sell the stock because we know that the stock price is going to fall and come closer to its intrinsic value.
After you understand the company & what they do, how they relate to the market and their customers, you will be in a position to decide whether the price of the companies stock is going to go up or down.
When investing in the stocks, we want the price of our stock to rise. Not only do we want our stock price to rise, we want it to rise FAST! So the challenge is to figure out: which stock prices are going to rise fast? Keep in mind that the price of the stock is not much important. The most important is the rise in the stock’s price by percentage. For example if you buy a stock A at price of 3000 Rs and after a month it rises to 3100 you get 3.3% profit and you buy another stock B at price of 10 Rs and after a month it rises to 11 Rs you get 10% profit. So A rises 100 Rs and B rises only 1 Rs still B is better than A by looking at profit. So when picking a company, we are interested in a company whose stock price will rise by a large percentage.
By looking at the above example, it may seem like a good idea to buy all the really cheap Rs.10 stocks hoping that their price will rise by 10% or more. This sounds good, but it can also be really bad some times! If it fall Rs.1 you will also loose 10%!!! So the question is how do you find out what the intrinsic value of a company is? To start finding out the intrinsic value, the investor makes an examination of the current and future overall health of the economy as a whole. After you analyzed the overall economy, you have to analyze firm you are interested in. You should analyze factors that give the firm a competitive advantage in it’s sector such as management experience, history of performance, growth potential, size of firm, brand name, customer base, competitive advantages, local and global market presence, Production capacity etc. Find out as much as possible about the company and their products.
Other than these fundamental analysts use different tools and ratios like EPS, PE, PEG etc. to compare all companies. To know about it read my “Stock Market Ratios – EPS, PE, PEG ” article.
