The first time you see the heartbeat line of your latest investment begin to drop, worry sets in. Recent bearish trends in the Nifty have also seen traders begin to consider the options at hand. As a new trader and without the intuitive prowess of the likes of Warren Buffet, how do you make initial trading decisions?
Even with access to all the information you could ever need on the global search engines, trading decisions are still notoriously difficult. Your decisions can make it or break it for you, so there is an imperative need to try leverage the market situation as best as possible.
Governmental policies, famines, oil prices and a bad hair day for Donald Trump all come together to influence the market in an unpredictable manner, making perfect guesses near impossible. However, you can understand some of the factors that influence stock values in order to supplement your decisions.
A rookie investor often trades based on incomplete facts, but a seasoned investor is well informed and knows that the stock market is all about numbers and beating the odds.
So with that in mind, let’s begin with the following two types of analysis to get a better idea of how to gain some insight into your decisions:
1. Fundamental Analysis
This is the analysis of the financial data of a company in order to find its intrinsic value – it’s actual worth. This is not the same as its market value since that merely reflects the price of its outstanding shares. This market value may be inflated or completely skewed based on investor hype or any other number of reasons. By determining the actual value of a company, you can make an investment decision based on the real-world growth and prospects of the company.
Analyzing a few fundamental quantitative indicators like, EPS (Earnings Per Share) and P/E Ratio (Price to Earnings Ratio) will assist in better understanding the company’s position.
• Earnings Per Share
EPS indicates a company’s profitability. It is calculated by dividing the earnings available to equity holders with the outstanding shares of the company. Typically a higher EPS is preferred when deciding to invest.
• Price to Earnings Ratio
P/E Ratio is a measure of a company’s value (share price) relative to its (expected) earnings. An investor should compare the P/E Ratios of companies in the same industry when considering this aspect. A high P/E Ratio indicates that a company’s stock is highly valued based on how it is expected to perform.
However, a high value does not necessarily mean an investment in those shares is wise, since prices may also be overvalued. Try trading shares with both a high and low P/E Ratios on Trakinvest and contextualize their growth or decline with any information you can find on the market. Decisions made on this aspect often require a lot of additional insight and intuition.
Fundamental analysis calls for in-depth understanding and cohesive use of various indicators to make an investment decision. The Ti Research Hub is a great source of information where you can experiment with different information and data to make decisions.
2. Technical Analysis
Unlike a fundamental analysis, technical analysis looks at a company’s stock characteristics to estimate its value and trends. Historical data is used to predict the direction of the market. The aim is to predict future price trends based on price trends of the past.
The two primary components of this type of analysis are price trends and volumes.
• Price trends
A price trend can be either upward or downward. Looking at historical peaks and troughs of the price and mapping its trajectory helps create a prediction for future trends.
This is the number of shares being actively traded during a certain period of time. Volumes help in determining the strength of a prevailing trend. An upward trend with a decreasing volume of shares being traded may mean the trend could slow down or reverse for example.
Technical analysis is not restricted to only price trends and volumes, but also takes into account a number of other technical aspects. Check out the Ti Research Hub for more data around stock history and prices.
While both technical and fundamental analyses have their own advantages, a learning investor should use a combination of both when learning to predict the market. Strengthening an understanding of the fundamental and technical components of the market goes a long way in supplementing random guesses.