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Fundamental and technical analysis are the two commonly used methods to scrutinize financial securities and can help investors to pick the right stocks. The use of these techniques is a matter of the trading style or approach one follows in the stock market. Both have their strengths to reveal potentially valuable information.
Fundamental Analysis
Fundamental analysis involves examining a company based on several factors like financial strength, management standards, earnings, assets, and liabilities. This method is generally preferred by long-term investors to identify stocks offering strong growth potential at a reasonable price.
Effective Ways to Pick Stock Using Fundamental Analysis
Fundamental analysis relies on various financial metrics.
Financial Ratios for Stock Screening
One can use various financial ratios to compare companies in the same industry. Key ratios used for the initial screening of the stocks are as follows:
Earnings Per Share (EPS) is used to estimate the company’s net profits. It is also used to compute various other financial ratios. A higher and growing EPS in the past five years shows that the company is generating greater profits. Investors can consider such companies to make investments.
Dividend yields should be regular. Many companies provide dividends to their shareholders. As a thumb rule, a consistent and growing dividend yield is a good sign for long-term investors. Investors can consider demat account opening online and investing in dividend-paying companies.
Price-to-earnings (P/E) ratio should be low. The ratio going high means that the stock value is high and investors are paying more for the share. An ideal PE ratio varies for different industries.
Price-to-book (P/B) ratio also indicates the stock value. A high ratio means a stock is trading at a higher value than its book value. There is high expected earnings growth and high returns on equity.
Understand the Business
Investors need to understand the company, its products and services, its prospects, its management values, etc. It gives investors insights into the company’s performance, and whether the company management is taking the right decisions to achieve its future goal. It helps them to decide if they should pick the stock. Investors can mine all the information about the company’s business, products, management, and promoters.
Scan the Company’s Debt
Huge debts can decline a company’s performance. Stocks of such companies may not perform well. Therefore, investors consider companies with low debts. They can consider companies whose debt-to-equity ratio is less than one.
Technical Analysis
Technical analysis is based on statistical patterns on stock charts concerning trendlines, indicators, price movements, behavioral aspects of traders, etc. It helps traders to know the future price and volume movements. It is helpful for short-term or active trading, like intraday trading, enabling traders to focus on the price and volume.
Effective Ways to Pick Stock Using Technical Analysis
When picking stocks using technical analysis, stock traders’ focus is on the stock price and movements. They identify trends and patterns to know future market movements.
Analysing price charts to know price movement
Active traders attempt to predict price movements by analysing price charts in different time frames. Technical analysts prefer charting on these timeframes – 5-minute chart, 15-minute chart, hourly chart, or daily chart, depending on the trading style. Intraday traders may prefer to analyse the 5-minute or 15-minute charts for price movements. Long-term traders may incline to analyse hourly, daily, or even weekly charts to pick stocks.
Identifying Trends
A trend shows the market direction. Technical analysis helps traders to identify trends using a trend line that connects the highs and lows of a stock price. Once traders identify the trend, they can pick the right stock and strategize the trade in the trend direction. Moving average (MA) is used to know the direction of a price trend. Bollinger bands can be helpful to predict long-term price movements.
Thus, using the valuable information revealed by both forms of analysis, individuals can invest in the right stocks. Investors can look at fundamental aspects to select the stocks and technical factors to determine the timings or price to buy or sell them.
Benefits of trading with a demat account?
A demat account holds all your financial instruments in electronic form. It can be used to hold shares, corporate bonds, ETFs, mutual funds, and government securities. It is possible to settle trades electronically with the help of a demat account and a trading account.
The transactions like buying and selling of shares are completed with the help of a trading account. Trading online becomes much more convenient and hassle-free with the help of a demat account. To encourage trading amongst retail investors, many brokers are offering a free demat account nowadays. The benefits of demat account include:
Buying & selling shares in odd lots
Before the introduction of demat accounts, the traders had to purchase shares in bulk. However, as the dematerialisation of shares makes tracking transactions convenient, it is possible to buy and sell shares in odd lots.
Corporate benefits
The company of which you have bought shares might issue dividends, bonus shares, splits, and right issues after regular intervals. All these corporate benefits are credited directly to your demat account.
IPO application
It is also possible to get information regarding upcoming IPOs through your demat account. The application of IPO via bids can be completed online through a demat account.
Loans against securities
The securities that are held in your demat account can be used as collateral whenever you need to arrange funds immediately. The securities will continue to attract dividends and other corporate benefits in the same way even after pledging to avail of a loan.
Dematerialisation of securities
Dematerialisation of securities means converting physical securities into electronic format. A demat account facilitates the service of dematerialisation. You may also convert the electronic securities back into physical form through a process called rematerialisation.
Tracking investments
It is easier to track investments online through a demat account. You may also freeze your demat account when you don’t intend to use it. It ensures the complete security of your holdings.
By Nancy Ahuja Delhi
who is a self-dependent girl who has been running her business for the last 3 years in Delhi. She has a couple of years of experience in the field of business and loves to write about finance, gadgets, business, and lifestyle.
Member since October, 2022
View all the articles of Nancy Ahuja Delhi.
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