Although the thrill and excitement of the stock market is a major attraction, people enter the market to book profits at the end of the day. Every investor/trader aims to increase their profits and that is their primary goal when they start investing. This requires a combination of skills some of which are the ability to research and analyse, the discipline to stick to one’s strategies, being alert and cautious for surprises, and the ability to think on one’s feet and improvise the plans quickly.
Fundamental Analysis
Understanding Company Value
Fundamental analysis refers to the assessment of how healthy a company is financially. This analysis involves going through the financial statements and reports published by the company. One has to be aware of the management and the members that form an integral part of it. An understanding of the industry that the company belongs to is important as well. The overall market conditions also need to be studied. All of this analytical tasks are aimed at assessing whether a stock is valued right or over/undervalued.
Key Metrics
While doing the fundamental analysis one needs to be mindful of three key metrics. The EPS, the PE Ratio, and the ROE. EPS, Earnings Per Share, determines how profitable a company is. The EPS value has to be higher to indicate a highly profitable business. The P/E Ratio, or the Price-to-Earnings Ratio is a comparison of the company’s current share price against its earnings per share. Higher P/E indicates an overvalued stock, whereas a lower P/E indicates an undervalued stock. ROE, Return on Equity, evaluates how well the company has used its assets in the course of business.
Analysing Industry and Market Trends
Fundamental analysis is mostly about analysing the company, however, it is not fully limited to that. Being educated about the industry that the company belongs to is also crucial. And finally keeping up with the trends of the market is also an integral part of the fundamental analysis.
Technical Analysis
Technical analysis relies on historical data on the price and volume of trades to forecast the potential rise/fall in the stock prices in the near future. It is primarily about studying charts and recognising patterns besides going through the technical indicators for insights.
Chart Patterns
Chart patterns are like signatures of a price movement pattern and a trained eye can easily spot a familiar pattern by looking at the chart. For instance, the head and shoulders pattern is a strong indicator that an ongoing uptrend is likely to reverse soon. Conversely, a double bottom can indicate a bullish reversal following a downward trend of the stock price. This pattern recognition can be compared to star gazing in a way, where the goal is to identify shapes and figures. Most online trading platforms in India offer seamless tools to analyse these patterns.
Indicators
Meanwhile technical indicators are often metrics and measurements that help the investor come to an understanding about the direction that the market is likely to take. Moving averages, for example, assists in trend recognition by making the price data smoother for analysis. Another metric, which is called the Relative Strength Index, RSI, helps measure how fast and how much the price movements change and point out overbuying and overselling trends in the market.
Timing the market
Technical analysis is of great assistance when it comes timing the market, which can be exhausting to do. While the fundamental analysis focuses on helping an investor with general directions on actions to take, technical analysis helps the investor time their actions with precision.
Risk Management
Diversification
Diversifying one’s portfolio is an inevitable part of making sure one treads the path of profitability in the stock market. It is the process where an investor spreads out his money across various classes of assets. Investing in companies from different sectors or geographical regions is an important part of diversification. This is a crucial part of risk management that needs to be treated as a key aspect of the investment process. Diversification may not eliminate risk altogether but it significantly reduces the intensity of risk involved.
Stop-loss orders
Setting stop-loss orders in one’s trades is important to limit the scope of risk involved in the transaction. This makes sure that when the stock price is moving in a direction that results in a loss for the trader, the stock is sold at a certain point, to limit loss to that level. This is a safe approach that can help traders and investors control their risk. It is also important to set the stop-loss order at an optimal level.
Conclusion
While the stock market might prove to be a complex space initially, if one follows the steps with discipline and focus, and sticks to their strategies then profits can definitely be made. The fundamental analysis points an investor toward the right stocks, the technical analysis helps the investor time their transactions right, and the risk management techniques help them control the scope of losses and trade safely. Paying attention to all these aspects can assist an individual in maximising their profits in the stock market.
