The Basics of Stock Market Analysis
You can analyse stocks by studying the fundamental factors of a company (e.g. profits, debt etc.) or by studying past trends and patterns. Which type of analysis should you use?
Hello and welcome to our educational series - Learn with Upstox.
Here you’ll find theories - from the easiest to the hardest, explained in a simple yet practical manner.
So, let’s begin with the basics.
What is the Stock Market?
Let’s make it simple. I can call stocks as shares and shares as partnerships. This market is called the stock market or the share market or the cash market and even the equity market.
But basically, when you buy a share in the company, you’re buying a small partnership or a part ownership in the company. Earlier, when you used to buy shares, you used to get a certificate which you could keep in your locker but now your shares are stored in a Demat Account.
What is a Demat Account?
Demat account is basically a place where you can keep your shares securely along with the depositories. Which means that in order to start trading in the share market or to buy and sell shares, you need a Demat account. You can even open your Demat account with Upstox.
Now let’s get into the details of the Stock Market.
So we know that the stock market is a place where you can buy stocks. But, how does this market work? If you’d asked me this ten years ago, I would’ve given a different answer but now I’ll say this: The stock market works through the internet.
There is an exchange. The exchange is connected with companies like Upstox. And then these companies are connected to us - the traders. Now if I want to buy a share, I’ll go on Upstox, then Upstox will tell this to the exchange. What the exchange will do now is that it will go to another user on Upstox and ask if they want to sell a share. And if that user wants to exchange, then the share will get exchanged. This means that I didn’t buy the share from Upstox or even from the exchange. I bought it from a fellow trader.
Stocks are bought and sold from fellow traders. So this is a medium. I just gave you a simple example of how the market works person to person. The company will charge some fees from me and the exchange will charge some fees from the company.
This is how I can buy and sell shares using the internet.
How does a Share price change?
Now, let’s look at how the share’s price changes.
Consider this example:
I want to sell this laptop which I use and I keep it’s price, the market price, as Rs 1,10,000. Say, I put it up on my social media accounts that I want to sell my laptop at this price but no one is interested to buy. One person asks me to give it to him for Rs One Lakh. I agree and now the market price of my laptop is Rs One Lakh. Let’s say that the laptop was bought by Rahul.
Now, Rahul uses it for three months and then he finds a buyer who will buy it for Rs 1,20,000. He sells it and now the market price of the laptop is Rs 1,20,000.
So, basically share prices change when buyers are ready to pay more or less to buy that share. But why would a buyer agree to pay more? Buyers will agree to pay more if they see a potential in the company. Hence, Share prices often fluctuate on the basis of perceived potential of the company.
But, how would you know that the company’s potential is going to increase?
To know this, you have to do Analysis.
Types of Analysis
There are only two types of analysis.
- Fundamental analysis and
- Technical analysis
First, let’s talk about fundamental analysis.
What is Fundamental Analysis?
When we study about a company fundamentally we consider things like- what is their annual report, how is their business performance, what are its quarterly results, how many expenses is the company making or what are it’s financial ratios, how many assets does it own, does it have to pay off a loan, does it need to take a loan, how many goods are there in the company inventory, how many goods does the company needs to buy, etc etc. When we study a company’s growth based on these factors and see that it is showing a positive growth, year on year then we make long term investments in that company.
When we check all these factors and make long term investments, it is known as the fundamental analysis. It is basically a study of the fundamentals.
But, what if I have to trade tomorrow? Can you make a fundamental analysis then?
A company could be fundamentally strong but it’s share prices may still drop tomorrow, or day after or the day after that. It is possible that it could continue to drop for an entire month.
And that is why we have a second type of analysis because fundamental analysis is for long term traders.
What is a Technical Analysis?
Technical analysis is used by short term traders. It is a methodology of analysing in which charts are studied, some methods are applied and price behaviour is studied according to historical data.
Simply put, it is a method where things can be studied technically as to what might happen tomorrow or the day after. It’s not like making astrological predictions, we are just analysing the output while considering what might happen, if this other thing happens. And this is known as technical analysis.
And this is all for this article. I hope that this cleared some air on basic stock market analysis. If it did, and if you want to learn more about investing, check out other posts in this series on our blog or you could also check out our YouTube channel for the same.
Thank you and have a good day!