Benjamin Graham once said, that “the individual investor should act consistently as an investor and not as a speculator.”
Here, he meant to say that the investor should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.
You cannot depend on your stock broker’s credibility for each and every decision. It’s your hard earned money so you must know where it is being used. Stock analysis is not a rocket science. It is all about analyzing organization-specific data. It is a research, based on the performance of a company.
Basically, there are two methods of analyzing a stock.
a) Fundamental Analysis
b) Technical Analysis
a) Fundamental Analysis:
Fundamental analysis is basically the study of financial environment of the stock in which you are going to invest. It is based on the study of three key areas; the economic condition of the country, the industry and specifically that organization in which you are going to put your hard earned money.
Fundamental analysis is a bit qualitative. You need to focus on quality standard, such as;
- profit margin
- management quality
- business model
- financial strength
- growth &
- political stability
This analysis enables you to realize the bigger picture. It gives an insight which you may ignore if you only see the technical aspect.
b) Technical Analysis
Technical analysis is the study of the past price movement of the stock to use this information in judging the future price movement. This analysis is generally taken for short-term and mid-term investment.
Technical analysis basically depends upon three principles:
- Market action discounts everything: It is believed that almost all the relevant data is reflected in the prices of the stock. The market, itself, is a representative of the entire market participant in a whole and it represent their views of the future.
- Price moves in trends: This principle is based on Dow Theory. In this principle, it is believed that price changes in a trend. It means, if a trend has been set up, then in future, price change will be in same direction as of the trend.
- History tends to repeat itself: In this principle, the repetitive nature of price movement is taken as the base of the analysis. It has been observed that market participants, time and again, tend to react to similar stimuli. This principle is foundation of technical analysis which is actually the analysis of historical information to predict future movements.
Warren Buffett has said that, “Price is what you pay; value is what you get.” What really counts is that what you have at the end. It is your money; you need to take care of it.