How to Analyse Stocks – Methods & Tips for Smart Investing

One evening, Ramesh, a 30-year-old software engineer from Bengaluru, decided to invest ₹7,000 from his savings in the stock market. He turned to his friend, Anjali, a seasoned investor, and said, "Anjali, I have ₹7,000 and I want to invest in shares, but I don't know how to analyse them. Can you guide me?"

Anjali smiled and replied, "Of course, Ramesh! Analysing stocks is essential before investing. Let's start with the basics."

Understanding Stock Analysis

Stock analysis involves evaluating a company's financial health, performance, and market position to make informed investment decisions. There are two primary methods:

1. Fundamental Analysis: Assessing a company's intrinsic value based on financial statements, industry position, and economic factors.
   
   
2. Technical Analysis: Studying historical price movements and trading volumes to predict future stock behaviour.

Fundamental Analysis: Evaluating the Company's Health

Anjali explained, "Fundamental analysis helps determine a share's true value. Here's how you can approach it:"

1. Analyse Financial Statements

• Income Statement: Shows the company's revenues, expenses, and profits over a period.
• Balance Sheet: Provides a snapshot of assets, liabilities, and shareholders' equity.
• Cash Flow Statement: Details cash inflows and outflows from operations, investing, and financing activities.

2. Key Financial Ratios

3. Qualitative Factors

Beyond numbers, consider:

• Management Quality: Experienced and ethical leadership can give you a good growth opportunity.
• Competitive Advantage: Unique products or services that set the company apart.
• Industry Position: Market share and standing among competitors.
• Economic Conditions: Macroeconomic factors affecting the industry.

Technical Analysis: Decoding Market Trends

Anjali continued, "Technical analysis focuses on price movements and trading volumes. Here's how to get 

started:"

1. Price Charts

• Line Chart: Plots closing prices over time.
• Bar Chart: Shows opening, closing, high, and low prices.
• Candlestick Chart: Visualises price movements with coloured bars.
  
  Read More – How to Identify Undervalued Stocks Like a Pro Investor

2. Trend Analysis

Identify the share's direction:

• Uptrend: Higher highs and higher lows.
• Downtrend: Lower highs and lower lows.
• Sideways Trend: Little overall movement.

3. Support and Resistance Levels

• Support: Price level where buying interest prevents further decline.
• Resistance: Price level where selling pressure prevents further rise.

4. Technical Indicators

Combining Both Analyses

Anjali emphasised, "Using both analyses provides a comprehensive view."

• Fundamental Analysis: Determines what to buy.
• Technical Analysis: Determines when to buy.
• Sideways Trend: Little overall movement.

After combining Both Analyses

Anjali emphasised, "Using both analyses provides a comprehensive view."

• Fundamental Analysis: Determines what to buy.
• Technical Analysis: Determines when to buy.

Step-by-Step Guide to Analysing a Stock

1. Understand the Business: Know what the company does and its revenue sources.
2. Review Financial Statements: Analyse income, balance, and cash flow statements.
3. Calculate Financial Ratios: Assess profitability, liquidity, and solvency.
4. Evaluate Management and Industry Position: Research leadership and market share.
5. Analyse Price Charts: Identify trends and patterns.
6. Use Technical Indicators: Confirm trends and potential entry/exit points.
7. Monitor News and Economic Indicators: Stay updated on factors affecting the stock.

Case Study: Analysing ABC Ltd.

Let's apply the analysis to a hypothetical company, ABC Ltd.

Fundamental Analysis

• EPS: ₹10
• P/E Ratio: 15
• D/E Ratio: 0.5
• ROE: 20%
• Current Ratio: 2

Interpretation:

• Reasonable valuation (P/E).
• Low debt (D/E).
• High profitability (ROE).
• Good liquidity (Current Ratio).

Technical Analysis

• Trend: Uptrend over the past 6 months.
• Support Level: ₹140
• Resistance Level: ₹160
• RSI: 60 (neutral)
• MACD: Bullish crossover

Interpretation:

• Positive momentum.
• The potential breakout above resistance.

Risk Assessment Before Investing

Anjali reminded Ramesh, "Analysis is great, but risk assessment is equally important."

Red Flags to Watch Out For

Her advice was: "Avoid companies with these red flags no matter how tempting they seem."

Conclusion

After weeks of learning, analysing, and applying both fundamental and technical analysis, Ramesh felt confident. He selected a few stocks based on their strong financials, industry leadership, and upward price tendencies. He did not simply follow stock advice; he made data-driven selections.

Also Read - How to Select Stocks for Intraday – Beginner to Pro Guide

 Ramesh smiled and added, "Thank you, Anjali. I now know how to properly evaluate equities.  "It's not gambling; it's intelligent investing."

Anjali smiled, "Exactly!" Investing is a journey. Continue to study, keep informed, and never panic during turbulent conditions."

Frequently Asked Questions (FAQ)

Which is better: fundamental or technical analysis?

Both have their applications. Fundamental analysis assists in selecting the proper investment, whilst technical analysis advises on the time of your entry and departure.

How frequently should I evaluate my stocks?

Ideally, you should examine your portfolio every quarter when financial results are announced, or sooner if there is significant economic or company-specific news.

Can beginners rely solely on stock screeners?

Screeners are a good place to start, but you should always read more about reports, ratios, and news before investing.

Is technical analysis beneficial in long-term investing?

While technical analysis is more commonly employed for short-term transactions, it can also help long-term investors identify appropriate entry positions.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?