These days, you do not need a degree in finance to analyze and invest in the stock market like a pro. Even if you’re a budding investor, all you need are the key metrics to look out for, and you’ll be able to discover gems in the market.
Stock market analysis is a process. Most experienced analysts start by studying the industry and then move on to the companies within it. After carefully studying each company based on its business model, financials, growth rate, and management, they go on to examine the historical performances of those companies on the stock market. At the end, they’d have gathered enough information to pick the undervalued assets in the market.
This article discusses how you can streamline the process and analyze the stock market in five minutes like a pro.
Simple Steps to Analyze the Stock Market like a Pro
Reading stock reports from many top-tier analysts will give you a heads-up about the analysis process. However, these simple steps contain all the important information you need to analyze the stock market in five minutes like a pro.
Whether you choose to start your analysis with the industry or with a particular company, the result is the same. You’re seeking to know whether a company is undervalued or overvalued in the stock market. Here are the important steps to follow:
1. Analyze the Industry
Studying the industries of certain companies you wish to invest in is a necessary first step. This process reveals to you the degree of competition in the industry, the strengths and weaknesses of the companies in it, and the limitations they all have. Most importantly, you’ll know if the industry has the potential to grow your investment as rapidly as you expect.
You can access data and facts about any industry by studying the industry section of a few companies’ annual reports. It’s always best to look at more than two reports to get a clearer picture. Furthermore, you can subscribe to magazines and websites that provide information on the specific industries you’re interested in.
2. Analyze the Business Model
Once you have a grasp of the industry prospects, proceed to study the business models of the companies you picked. This will give you a view of how a company is run, and whether it is, or
has the potential to be valuable. A business model analysis shows you the strengths and weaknesses of a company and how they are being utilized or addressed.
At this point, you can see if a company can grow to be a market leader, irrespective of the industry’s limitations and market capacity. Similar to industry analysis, you can find information about a company’s business model in its annual reports. You can also get further objective views from trade magazines and websites.
3. Look at the Company Financials
While the information presented in a company’s annual reports can be fine-tuned to meet your expectations, the numbers in the financial reports don’t tell lies. The income statement, balance sheet, and cash flow statement reveal the true financial strength of a company.
Even if you don’t understand financials, there are certain numbers you need to look at to discover the true nature of a company’s financial strength. If you can calculate or locate a company’s gross profit margin, current ratio, inventory turnover ratio, return on equity, etc., you can successfully interpret its financial performance.
To be frank, the information you need to determine whether a stock is worth buying or not is hidden in the financial statements. Therefore, it’s important you do your best to understand them if you intend to analyze the stock market like a pro.
4. Study the Organization’s Management
The management of an organization plays a great role in its growth. In fact, merely studying the management and its policies will tell you whether a company is heading north or south in the stock market.
Therefore, before you invest in a stock, do well to study the profile of every decision maker in the company. But that’s not all. Also ensure you study their policies, plans, and visions for the company. Every decision made by the management has an impact on the company’s value on the stock market. Therefore, neglecting management in your analysis would mean intentionally missing out on a key piece of the puzzle.
5. Examine the Company’s Growth Prospects
The earnings of a company and the expected growth in its future earnings are key factors that determine the price of its stock. Therefore, when analyzing a company’s stock, look at its earnings and compare them with its past earnings. If its current earnings show an increase from its past earnings, it shows the company is doing well. Furthermore, a study of its expected future earnings will prove if there’s potential for growth or the company has peaked. These earnings are represented in the financial statements by earnings per share (EPS), cash flow per share, and dividends per share.
What’s more, you can see the direction of a company through its current investments. If the management is making investments in technology and research and is looking to diversify outputs, then there’s hope for growth.
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6. Study the Stock Value
Another aspect to consider when looking to analyze the stock market is the stock’s current market value. The P/E ratio, which examines the intrinsic value of a stock by dividing the price by the EPS, is used to calculate this.
While a high P/E ratio indicates that the stock price is high and possibly overvalued, a low P/E ratio indicates quite the opposite. Therefore, when comparing company stocks with those of its competitors in the industry, the P/E ratio would be vital to discovering the gems in the industry.
7. Set a Target Price
Once you’ve determined the value of a stock, the next thing is to set its target price. This refers to where you expect the price to be in the next 12 months, based on its current valuation. In fact, you can’t analyze the stock market without coming up with target prices for the companies you examine.
Different analysts can come up with different target prices for a particular stock. These target prices are merely forecasts based on your stock valuation and are therefore subject to error. However, if your analysis is correct, you should at least know the direction of the stock price in the future.
Ready to Make Your First Stock Analysis?
Learning how to analyze the stock market is a skill most investors cherish. This is because only a few investors know how to do it properly. Every investor wants to maximize their profit. The majority of them pay for stock advice and recommendations from professional analysts.
However, the process of fundamental stock market analysis is quite simple, as shown in this article. So, if you’re prepared to conduct your first stock analysis, read this article once more to absorb the knowledge provided.
