What is Stock Analysis?

It’s easy for traders to think of stocks as just a few letters and a blip on a stock chart.

Lest we forget, every stock represents a company — a business replete with employees, products, offices, factories, and a board of directors.

Many companies represent the hopes, dreams, and visions of one or more entrepreneurs.

There’s a three-dimensional reality behind those letters and dots, and that helps determine whether the stock’s price goes up or down and whether it’s worth trading.

Every company is different. That’s why it’s important for you to understand why some companies go up in value while others go down…

How to do it? Stock analysis.

Stock analysis is the process of closely examining stocks and uncovering the facts. That way, you can make the most rational, emotion-free decision possible about whether the stock is likely to go up or down, and whether or not it’s worth its current market value.

How Do You Analyze Stocks?

There are two main types of stock analysis. Whether you use one or the other — or both — depends on your goals.

If you want to invest in a company that will potentially be much higher in price 20 years from now when you’re retired, fundamental analysis is your primary need.

If you’re a penny stock trader looking to make a short-term profit in just a few hours or days, technical analysis is the number-one tool for you.

I use both, but in trading penny stocks, technical analysis definitely comes first and fundamental analysis ranks second.

Fundamental Analysis

With this approach, you’re looking at a stock as a share of ownership in a business — so you’re evaluating it as a business.

This can be as deep and involved as you want to go. Some Wall Street analysts specialize in particular industries; they learn everything they can about certain sectors.

Why? To give them a good look at how a company fits within its particular niche. Some questions to ask:

• How popular are its products?
• What is its market share?
• How experienced and respected are the company’s C-suite?

Many traders save time by focusing on the company’s financials. In the end, it’s the money that counts. If a company has a high net income, that’s the goal. If it’s losing money, it must either solve that problem or go out of business. The bottom line is the bottom line.

One of the most popular financial indicators in fundamental analysis is earnings per share (EPS). That compares the company’s net earnings to its outstanding shares of stock.

   Example: $10 million net income / 5 million shares of stock outstanding = $2 EPS

This indicator is good for comparing the company’s current EPS with its EPS for past quarters to find out whether it’s growing profitably. However, it’s not good for comparing one company to another — because companies have different numbers of shares outstanding and they have different market prices.

Thus, the price-to-earnings (PE) ratio is a better tool for comparing stocks. It takes the EPS a step further by comparing it to the stock’s per share market price.

   Example: $10 current market price / $2 EPS = 5 for the P/E ratio.

This means you’re getting $1 in current earnings for every $5 of stock you buy.

Historically, that’s very low, but you get the idea.

Technical Analysis

The theory behind technical analysis is that it makes fundamental analysis unnecessary because all of the company business information and finances is reflected in the stock’s price and its history, as indicated by the patterns and chart indicators.

It’s the primary form of analysis for penny stock traders.

My buddy and mentor, Tim Sykes, says he assumes all the penny stocks he trades will someday go out of business. He aims to capture a profit from riding their ups and downs.

It’s naive to believe you’re going to buy the next Apple for $5 per share. Sure, it’s not impossible, but don’t count on it.

So, as penny stock traders, our main concern is whether a stock is worth buying or selling because we can potentially profit from it going up (or down) within a short time frame.

You’re trading to make money today, like a job — but I and many other traders believe that trading is better than the average ‘job’ because the market is your only boss.

If you want to buy stocks to (hopefully) retire on, you can use fundamental analysis to find them. Be sure to keep them in a separate account. Don’t mix them up with your penny stock trades.

It’s All About the Charts

Stock charts are the basic tool of technical analysis. They trace the stock’s price for a specified period of time. They also show the trading volume for each day.

The time interval for a chart is usually one day, but when the markets are open, traders often watch the price action over five-minute intervals.

Candlestick charts also show a stock’s open, close, high, and low prices for the interval. If the stock’s price went lower, the bar is filled in. By looking at the pattern of filled and empty bars, the trader can easily see the price trend.

You should also look at the stock’s trend lines. Are they headed up? Down? Or is its market price just drifting in a straight horizontal line?

The Bottom Line

Buying and selling stocks without analyzing them first is like walking through a minefield blindfolded — sooner or later, you’ll blow up.

Nobody can completely predict the future, or everybody would trade stocks and it wouldn’t be profitable. But getting companies’ important information and analyzing stocks to set up your trades is the best way to try and put the odds in your favor. Your goal: Make more money than you lose.

It’s not easy, but it’s not ridiculously challenging. It takes time. When it comes to trading, you’ve gotta do the work. There’s no way around it.

Fortunately, StocksToTrade can help make it easier. No longer do traders need to visit 10-15 websites to keep up with all the most in-play stocks. With StocksToTrade, you have charting, news feeds, quotes, watchlists and more — all within an easy-to-use piece of software.

Regardless of how you choose to perform stock analysis, the most important thing is that you DO IT. Make stock analysis an essential part of your daily routine.

What type of stock analysis do you use? Leave a comment!