Last updated on November 19th, 2020 at 05:37 pm
Everybody wants to feel the thrill of getting great returns from the stock market, right?
So, what are you waiting for?
Oh! You must be frightening by the odds of getting all money lost or got a piece of great advice from someone who lost a hell of a lot of money to never try it ever. Whichever category you are let me break out the actual way people are earning tons of money from the stock market.
Putting money like gambling, going with the Hype of mass without actually analyzing the facts, lack of patience, and passion are some of the reasons why most people fail to get returns in the stock market and blame their luck for that.
Although the stock market looks easy it’s not, you should definitely commit yourself to learn about business, it’s working, and learn from your failure to get its fruitful result.
Earning a ton of money needs a considerable amount of time, it’s not an overnight success. So, accepting this fact consider yourself whether you’re going to be a trader or an investor.
Traders are one who buys stocks and holds it for some seconds or maybe a day or some months to sell it whenever he makes desirable profits but an investor is someone who buys stocks and holds it for 1 year or more to sell it for desire profits.
Traders buy stocks based on technical analysis whereas an investor trade the stocks on the basis of fundamental analysis score with some blends of technical analysis.
The way you check the quality, brand, materials, fitting of clothes before buying it, the same way you have to check, measure, qualify the shares of a company before you buy it. You have to study the business, economy, growth of the company before you consider to buy its stocks.
So Fundamental Analysis and Technical analysis are the two approaches with which you can analyze particular stocks for a greater return.
Fundamental analysis, as the name suggests, it is the analysis of a company from the basic to its advanced level. It analyses the whole company from its structure, branding, to financial statements.
Fundamental analysis is done assuming the fact that the current stock price value is not the true value of the stock, so they conduct fundamental analysis to find the true value of the current stock price.
It takes data of a particular company concerning the specific stock for over a large period of time and tries to get an Intrinsic value (True value) of the present stock price.
If the Intrinsic value of the stock is less than the actual stock price then the stock price is said to be overvalued and it’s risky to buy that specific stock while on the other hands if the intrinsic value of the stock is higher than the actual value of the stock it means the stock is undervalued and one day or other actual price is going to be intrinsic value so it’s profitable to buy that stock.
Fundamental Analysis of Stock Market
Fundamental analysis is divided into two parts; Quantitative (measurable in numerical terms) and Qualitative (cannot measure in numerical terms but only define on character or quality).
1. Quantitative Analysis
It is the analysis of quantifiable objects in a company or industry, which means the metrics of those which can be written and analyze in numerical terms. These include some major statements like The balance sheet, The Income statements, cash flow statements.
2. Balance Sheet
it is the records of the company’s all assets, liabilities, and Equity.
Here assets mean a company’s resources at a point in time including Inventory, cash holding, types of equipment, real-estate. Liabilities mean all the pre-owned debt of the company while equity means the total value of money that the shareholders contributed to the company.
The statements, auditor’s report, management discussion, and analysis (MD&A), and details of the company’s operation are available in the company’s annual 10-K and 10-Q quarterly filings.
10-k is an annual report which states the company’s performance for the year whereas 10-Q is the quarterly report of the company’s performance. There are three 10-Q reports released per year with one 10-k report at the end of the year.
3. Qualitative Analysis
The analysis which cannot measure in a numerical value is called Qualitative analysis. For example Brand Recognition, competitive advantages, management, etc.
As it’s can’t measure in numerical value It’s difficult to compare its value to other companies or industries. Qualitative analysis can be divided into 2 parts. 1st is company based qualitative analysis while the other is industry-based qualitative analysis.
Company Based Qualitative Factors
1. Business Model
It is the structural inflow of money to the organization that means how the company earns money through its business. Most of the businesses have a simple business model like Products-Modeling – Manufacturing- Supply chain- Sales- Profit while some business has a real estate business in spite of having a fast-food chain such as MacDonald.
2. Competitive Advantages
Does it symbolize how a company is better than its competitor is? How it’s characterizing its advantages over its competitor? It might be its technology which manufactures products faster than the competitor or a highly sought patent.
3. Corporate Governance
It is the policies of a particular company to hold its structure in a discipline. How easy is it to switch a top executive in the company? How strong is the company legally?
It is one of the top factors to consider while measuring qualitative analysis. How is the employee retention of the company? How motivated are they towards their works? How satisfied are they being employed there? How strict is the management towards honesty, integrity and discipline inside the company?
Try to consider these factors while answering some of the questions and analyze those answers to qualify its stock to consider a trade. Obviously, you can’t get a chance to ask these questions to a top executive but all you can do is examine their past work experience in the previous company from different sources. Watch their interview to find some personal characteristics trait to know their experience better. If you have any friends working in that specific company you can get some help from them.
Industry Based Qualitative Factors
A company’s stock also depends on its industry qualitative factors such as customer base, its competition, Industry growth, market shares, regulation, and business cycle period.
1. Customer Base
Some industry has huge customer base such as the telecom industry while some industry has low customer base such as an automobile as one customer only buy a car in 5 years. The more the customer base higher is the chances of its sale.
How competitive is the industry itself? How many companies are there in that industry? How hard is the entry barrier to that industry? Harder the entry barrier lower is the competition hence larger customer base for a leading company in that specific industry.
3. Industry Growth
The technology industry is the fastest growing industry in the present era while physical retail business is somewhat declining due to the presence of Online e-commerce. Hence an industry growth is a positive indication of the growth of the enlisted company in that specific industry.
4. Market Share
It is the acquisition of sales over a specific percentage of a consumer in an industry. If A company, sales a product to 40% population while B company sells similar competitive products to 60% population then a company is said to have 40% shares while B has 60% market shares over that specific period of time.
Many organizations and government bodies laid out a certain set of regulations for consumer safety and environmental protection. For example pharmaceutical company needs to follow a procedure to test its formulae until the industry specifies meet which takes lots amount of time, which affect its stock price.
6. Type of Business Cycle
Not every product can be used or buy throughout the year. Some products like Umbrella which used only in summer while its price continues to decline as winter approaches. So seasonal business should be a trade based on its seasonal activity.
These enlisted Qualitative factors are crucial to the Industry. Review all the factors before buying a stock of a particular industry.
Industry-specific news is not hard to find as it is available in news channels, an online journal, and industry specialized reports. Subscription-based journals are good options to get quality information.
7. Technical Analysis
It is the statistical analysis of the past performance of a company concerning a specific stock. It is believed that every fundamental analysis factors are included in the current stock price of the company and past performance repeat itself over a certain cyclic period.
Past performance data such as historical data, stock prices, and volume trade are analyzed to chart a pattern in a stock movement to predict the future price of the stock.
A technical analyst strongly believes that future performance can be determined by reviewing patterns based on past performance data.
While both analyses are considered to work in the stock market, Traders generally go with technical analysis while investor prefers fundamental analysis. For a great return in the stock market, it’s is advisable to use both technical and fundamental analysis.
Direct Equity trading is a great way to earns tons of money but great money comes with greater risk, patient, and Quality analysis. Practice with your demo account with actual risk keep in mind and never try with actual money unless you’re confident with the practice account.
Always be updated with market trends, Happy trading.