How to analyse a stock before buying

The Indian stock market has seen a rapid growth in the number of investors in recent years. A growing economy, good returns and stock trading at record levels are among the key factors driving investors to join the equity wagon. A recent NSE study showed that there has been a remarkable rise in the number of investors mainly below 30 years of age during the March 2018 to August 2024 period.

Investing in stocks can help grow wealth amid the rising markets. However, stock investment needs more than just selecting shares at random. A thorough stock analysis and stock market research could help investors make the most out of the favourable market conditions while minimising risks. It’s important to analyse a stock on various key aspects before buying.

Proper informed decisions should be taken while picking stocks to grow your money over time and reduce risks associated with equity investments. Various stock evaluation methods could be helpful in preparing a prudent investment strategy.

Stock market research helps in selecting shares that can increase investment value and meet investing goals. So, here are simple steps of how to research a stock or what popular stock analysis techniques you can deploy to pick winner stocks.

Stock Analysis Techniques

There are methods that market experts adopt to analyse a stock before buying. These can be fundamental, technical, qualitative and quantitative analysis techniques. Do not get confused with these technical names. Generally stock analysis can be put in two categories- fundamental analysis and technical analysis.

Let’s first understand fundamental vs technical analysis techniques and delve into the key factors of both:

What is fundamental analysis?

You can check a company’s fundamentals such as how it has performed in the past, its profits and revenue numbers, its business segment, competition and broader economic situations before buying stocks of that company. So, fundamental analysis helps evaluate a stock’s sectoral and broader conditions and its intrinsic value. The key to success here is to gain knowledge on how to research a stock.

You can check various financial ratios and financial statements of the company such as profit and loss account, balance sheet, cash flow, debt and other similar details to assess fundamentals of a company. A look at the company’s products or services portfolio and the order book will also help to get an idea about the company’s future prospects and expansion plans.

If fundamentals are strong, a company would steer through difficult times and would hold its value. These also give hints about the performance in future. Companies with strong fundamentals have long-term growth potential.

Here are some of the key aspects you can look for while doing a fundamental analysis before buying a stock:

• Earnings Per Share (EPS)
• Revenue
• Price-to-earnings (P/E) Ratio
• Price-Earnings-Growth (PEG) Ratio
• Price-to-Sales Ratio (P/S)
• Debt-Equity Ratio
• Debt-to-EBITDA Ratio
• Dividends

Technical analysis

You can also analyse the share price trend and supply and demand scenario of a stock before buying. An analysis of price trends, returns in the past week, three months, six months or one year, and its supply and demand is called technical analysis. Usually, historical price trends can also predict future movement of the price as history repeats itself. Technical analysis helps predict short-term movement in the share price. Stock price of a company is itself an indicator of its overall health and its growth potential.

Fundamental vs Technical Analysis

Whether you should pick shares based on fundamental analysis or technical analysis depends on financial goals and risk tolerance.

If you want to pick shares for long-term investment, fundamental analysis helps assess the risk while for day trading or short-term investment technical analysis could be a better guide.

Technical analysis does not take into account intrinsic value and stock price history is usually used to make price predictions.

However, there is no superior or inferior technique in stock picking. Investors should use all available information as per their objectives to pick up stocks.

Other Stock Analysis Techniques

There are other stock analysis techniques also. You can also go for quantitative analysis of stocks. This analysis relies on the use of statistical and mathematical modeling to review data. Here, mainly data and numbers are used to predict the future price movement.

A qualitative analysis about competition, business model, market advantage, sectoral trends and position of the company in the industry can throw light on future performance of a stock.

Conclusion

As there is no perfect technique to predict the future performance of a stock, investors should apply appropriate stock evaluation methods to select shares of companies. Sometimes professional analysis like research reports, price target trends and rating analysis also reflect insights on the evaluations of a stock. Investors should do research about all available data before committing their hard earned money to a particular share. It’s advisable to seek professional help in stock analysis from a brokerage or a financial planner before investing in equity markets.