An investor has to watch for several aspects of the financial market before they invest their funds. It may be the market and its instruments for trade, brokers available, commission, leverage, costs, spreads, customer support, exchanges, companies, research, analysis tools, deposit, withdrawal, etc. So altogether, trading is a long process.
Traders may start with a small investment but will have to monitor and trade regularly for the opportunities. For this, they keep analyzing and researching the market, the price movements, fundamental factors impacting the market, and many other factors. Hence, trading is not a day’s investment but a lot of background work and research.
The article discovers and explains the stock analysis tools that are used by stock traders for a profitable investment. We are sure that readers, by the end of this article, will be aware of the various analysis tools that they can apply for a better trade opportunity and maximum profits. So, let’s begin and know the stock market in detail for good investments.
The stock market is the space where traders can buy and sell the shares of a company. A trader can invest in the stocks in units, which are called the shares. Investors buy and sell the shares through exchanges that are issued by the company for public trading. The company issues the shares in the form of an initial public deposit (IPO) and is then available for the traders to invest.
Companies issue the stocks in order to raise money that can support their business expansion, production, and other activities that will make their company grow. The stocks are available through formal exchanges or via the over-the-counter (OTC) market. OTC traders can invest in stocks through online brokers such as Investby.
Investors should be aware that stock market and stock exchange are two different terms that are used interchangeably. The stock market is a whole market that provides various shares of companies, whereas the stock exchange is a subgroup of the stock market. Thus, the stock exchange is part of the stock market.
In the financial market, there are more than one stock exchanges that work to ease the trading process and make the market accessible. Some of the best-known global stock exchanges are the New York Stock Exchange, the Nasdaq, and the London Stock Exchange.
These operate with other exchanges of the countries to make the whole stock market work smoothly.
Types of Shares
The stock market offers its traders two types of shares; equity and preference shares. The shares have different benefits for the traders, and investors can make a handful of profits if traded properly.
Equity shares are the shares of the company that has good market value and allow the investors the right to vote in the company’s annual meetings. In addition, the traders are given the position of shareholders of the company. They can have dividends that are not fixed and are long-term financial instruments of the company.
In contrast, the preference shares are a bit different from equity shares as the facilities to the trader are shareholders can have a fixed dividend and are given priority over the shareholders during liquidation of the company. However, they do not have voting rights.
Traders can invest in the shares they feel are profitable and will be good for their trading goals.
Stock Analysis Tools
When trading in the stock market, traders have to do research and analysis to invest in the correct instrument of the market, know the entry and exits and predict the price movements. All this is possible only with the stock analysis tools; a trader can take guidance from these tools that help in research and study of the market price movements.
For stock analysis, traders have fundamental and technical analysis tools. It is upto the trader and the market conditions which stock analysis tools they want to apply. Before understanding the two types of analysis tools, let’s first know what analysis of the instruments means.
Stock analysis means to analyse the data collected for a beneficial investment. The data is individually analysed with different tools to get an idea of future price movements. Thus, traders evaluate and examine the stock market to make informed decisions of the trade.
The stock analysis is referred to as the equity analysis or market analysis. Most of the stock market traders use stock analysis tools for a successful trade experience. Traders get an insight into the stock market and the economy as a whole. In addition, the traders can know the individual stocks and make correct decisions.
In the stock analysis, the past and present data of the market are studied, which helps the traders form their trading methodology and trading strategies. Useful trading equipment that will make investing in stocks easier and more fruitful. Now that we have understood what stock analysis means let’s know the stock analysis tools.
Technical Stock Analysis Tools
The technical stock analysis tools are an essential part of the trading business as these study the price movements of the traded instrument. They look into the historical data of the stock traded on the charts and read the patterns formed for an informed decision.
The previous data of the stocks form a pattern on charts that are used for making predictions. In technical analysis, traders use various tools to have accurate trade. They can use the support and resistance lines, the market trends, etc., for stock analysis.
Technical indicators give the investors an insight into the supply and demand of the stock in the market and what market psychology is going on. Thus, forming the technical analysis tools that are used for trading. For the analysis of the market, traders have to take into account the trade volume giving traders information about the price movements.
This generates the trade signals which indicate the traders of the change expected. So, a trader is aware in advance of the price fluctuations and accordingly manages their investment. The market provides a lot of technical analysis tools, and it’s up to the trader which they find suitable for their investment.
Here we have discussed the technical stock analysis tools individually for readers’ understanding. The tools are charting tools which generate signals and indicate the traders about buying and selling and trends of the market. In trading, there are two kinds of technical tools:
Overlays: These are the technical indicators which use the same scale as the price is plotted above the top of the prices on a stock chart. Some of the overlays technical tools are moving averages, Bollinger bands, Fibonacci lines, etc.
Oscillators: These are not overlaid on the price of the stock chart, but these oscillate between the minimum and maximum that are plotted above or below the chart. Examples of oscillators include stochastic oscillators, relative strength index, MACD, etc.
A simple technical analysis, moving average (MA), is a popular trading tool that is preferred by traders globally for market analysis. It works smoothly to analyze the price data and provide traders with a constant update average price. Traders take the average period of time like 15 minutes, 1 week or 1 month or more that suits the trader’s investment.
So, traders can have tailored moving averages as per their requirement for stock trading or any other instrument. It could be used by traders for both long-term and short-term investments. The technical indicator is good for the stock market as it reduces the noise on the price charts, gives a basic idea of the price moving and when traders can invest in the stock market.
If the moving average is showing upwards, then the price will rise; if it forms a downwards pattern, prices will be low, and if it shows sideways movements, then there will be a price range.
A stochastic oscillator is an indicator that measures the current price relative to the price range for a specified period of time. The scale is formed from zero to a hundred, and traders can read the scale to analyze the stock price. It gives traders knowledge of the trend in the market.
If the trend is up, then the price will make new highs, and if it is in a downtrend, the price will make new lows. Stochastic oscillators are important to track the happenings of the market. It moves quickly due to the fact that the price can make rare continual highs, keep stochastic near 100, or the continual lows, which is keeping it near zero.
With this, traders can know the overbought and oversold situations of the market. If the values are above 80, it means that the market has an overbought condition, and if the scale is below 20, there is an oversold situation.
Average Directional Index (ADX)
The average directional index is the technical indicator used for trend analysis of the market. The indicator measures the strength and stimulus of the trend; when the ADX is above 40, the traders consider it as the trend which has a lot of directional strength. It could be volatile depending on the direction of the price.
However, when the ADX is below 20, traders consider it a weak or non-trending indicator. The ADX is a line of the stock chart, which is black in color with two more lines that are shown optionally. The optional lines are named as DI+ and DI- and are colored red and green, respectively.
All together show the market trend as well as the momentum of the trend of the instrument.
Moving Averages Convergence Divergence (MACD)
The MACD indicator is the trend technical stock analysis tool that guides the traders to know the direction of the trend and the momentum of that trend. With its signals, traders can know the market movements and make trade decisions. With the chart pattern formed with MACD, traders can understand the trend direction.
If the MACD is above zero, the price is in an upward trend; if it is below zero, then it has entered a bearish period. Moreover, the lines formed on the MACD chart are called the MACD line, and the signal line indicates the price of the instruments.
When the MACD line has cut across above the signal line, the price is rising, and when the line has crossed below the signal line, the price will be falling.
Fundamental Stock Analysis Tools
Fundamental analysis tools are the data of the company, which give traders a view of the company’s market position and what all factors can impact the price of the company’s stocks in the market. It also includes the macroeconomic environment to assess the potential profits it can generate.
A trader with the fundamental stock analysis tools is able to study the business of the company at the fundamental level and judge its financial health in the trade. With it, traders can gain knowledge of the ratios of business; the current stock price is undervalued or overvalued, the company’s health and growth, etc.
It is highly necessary for a stock investor to use fundamental analysis tools to determine the company’s worth in the market. Traders have to monitor the following factors of the company to understand its fundamental position:
- Earnings per share (EPS)
- Price on earnings ratio (P/E)
- Dividend payout ratio
- Cash flow statements
- Balance sheet
- Projected earnings growth
- Price-to-sales ratio
- Return on equity
- Price-to-book ratio (P/B)
- Dividend yield ratio
A trader has to go through a lot of financial records and happenings of the company to understand the position of the firm in the business. Thus, giving the price of the stocks held by the firm and whether the prices will either go up or down in the near future. An essential part of the trading process and stock analysis tools.
The stock market is an old market that involves the trading of shares of the companies. These are traded on exchanges or brokers that provide facilities and services to assist the traders. For profitable and correct investments, traders can use stock analysis tools.
The analysis tools give traders market predictions of the price of the stocks and what could be the next move traders can take for earning high profits. However, traders should use reputed and regulated brokers to have good services and have customer support in any difficulty.