If you are considering joining the stock market and becoming a successful trader, the solid basis of this process lies in getting to know the types of stock market analysis, which will allow you to hone your craft accordingly and become a prosperous trader. The stock market is highly unpredictable and can be volatile from time to time, nonetheless, a careful study of the market, along with good research and knowledge gathering can prepare you for smart decision making while creating your wealth on the stock market.
Various methodologies exist that are devised to analyze the movement of the market. These methods are viewed as purely scientific and are composed of multiple factors such as stock price movement, chart patterns, economy and the industry, company balance sheets, loss statements and profit. In this article, EuropeFX Review will cover the three basic types of stock market analysis which are elementary for every trader.
- Fundamental analysis
The study of a certain company’s stock prices with regards to the factors that affect the organization such as its revenue sources, financials, profitability and expenses is the main definition of fundamental analysis. This type of analysis exists to predict stock price movement in the long run. There are three essential steps to follow, when performing fundamental analysis on a specific stock:
- Company analysis
- Industry analysis
- Economy analysis
The named steps could be utilized in the top-down order or the bottom-up order, it’s not as significant as actually implementing all the steps before approaching a company and its stocks. The core of fundamental analysis is the ability to assess the fair value of a certain company and afterwards evaluate if the stock price is under or overvalued. This will aid you in further creation of your trading strategy and can guarantee profitable results, if executed correctly.
2. Technical analysis
Studying and observing statistical data such as volume, price movements, moving averages, chart patterns etc. is the basis of technical analysis. Technical analysis experts believe that the market always moves in a predictable way – in patterns. Tracking these patterns and learning about them can assist traders in forecasting the movements of certain stocks. These movements have occurred previously and they will likely happen again in the future, causing a downward or an upward movement in the stock market place. Predicting the market movement is strictly tied to technical analysis, in contrast to fundamental analysis.
3. Quantitative Analysis
The third and final type of analysis is called the quantitative analysis which is based on mathematical formulas that help in predicting the price movement of a certain stock, based on some predetermined conditions. If the conditions are satisfied, a call is given to traders to buy or sell, depending on the results of the utilized equation. Quantitative analysis experts, also dubbed quants use various types of data that involves historical investments and data related to the stock market that helps in creating computer models and algorithms.
All of these types of analysis that can be implemented on the stock market have their pros and cons; not a single one of them individually can carry the title of the perfect market analysis type. Many cases suggest that it’s best to look at every stock individually, given that some situations made it clear that one analysis can show one thing, and the second one a completely different potential movement. The recommended course of action for traders is to do their own research and enter the stock market place only after careful consideration and market assessment.