Analyzing a stock involves evaluating its financial health, growth potential, and market position. Let’s dive deeper into fundamental and technical analysis.
Fundamental Analysis:
This method focuses on a company’s financial statements, industry position, and economic factors.
- Financial Statements:
- Income Statement: Shows revenue, expenses, and profit over a specific period.
- Example: Netflix’s income statement reveals its revenue growth from 20billionin2020to20billionin2020to25 billion in 2021.
- Balance Sheet: Lists assets, liabilities, and equity at a specific point in time.
- Example: Apple’s balance sheet shows over $200 billion in cash reserves, indicating strong financial health.
- Cash Flow Statement: Tracks cash inflows and outflows, including operating, investing, and financing activities.
- Example: Tesla’s cash flow statement shows significant capital expenditures for building new factories.
- Income Statement: Shows revenue, expenses, and profit over a specific period.
- Valuation Metrics:
- P/E Ratio (Price-to-Earnings): Compares a stock’s price to its earnings per share (EPS). A high P/E may indicate overvaluation.
- Example: If a stock trades at 100anditsEPSis100anditsEPSis5, the P/E ratio is 20.
- P/B Ratio (Price-to-Book): Compares a stock’s price to its book value (assets minus liabilities).
- Example: A P/B ratio below 1 might indicate an undervalued stock.
- Dividend Yield: Annual dividend per share divided by the stock price.
- Example: A stock paying 4annuallywithapriceof4annuallywithapriceof100 has a 4% yield.
- P/E Ratio (Price-to-Earnings): Compares a stock’s price to its earnings per share (EPS). A high P/E may indicate overvaluation.
- Growth Potential:
- Revenue Growth: Increasing sales over time (e.g., Amazon’s consistent revenue growth).
- Earnings Growth: Rising profits (e.g., Apple’s increasing EPS year-over-year).
- Example: A company with 20% annual revenue growth is likely expanding its market share.
Technical Analysis:
This method focuses on price movements and trading patterns to predict future trends.
- Charts and Patterns:
- Support and Resistance: Levels where a stock’s price tends to stop falling (support) or rising (resistance).
- Example: If a stock repeatedly bounces off $50, that’s a support level.
- Trend Lines: Lines connecting highs or lows to identify trends.
- Example: An upward trend line indicates a bullish trend.
- Support and Resistance: Levels where a stock’s price tends to stop falling (support) or rising (resistance).
- Indicators:
- Moving Averages: Smooth out price data to identify trends (e.g., 50-day or 200-day moving averages).
- RSI (Relative Strength Index): Measures overbought or oversold conditions (above 70 is overbought, below 30 is oversold).
- Example: If a stock’s RSI is 75, it might be overbought and due for a correction.
- MACD (Moving Average Convergence Divergence): Shows the relationship between two moving averages.
- Example: A MACD crossover above the signal line indicates a bullish trend.
