Types of Stock Market Analysis

Investors use different types of market analysis to select which stocks to invest in. Proponents of different market analysis techniques swear their method is the most effective. No technique has been shown to have an overall advantage; the key to success in the market is to find the methodology that works best for you.

Market analysis falls into three broad categories. Fundamental analysis examines the business itself; quantitative analysis evaluates businesses from a strictly numerical standpoint; technical analysis is based on charting, or examining relative trends. There are several different techniques within each of the broad categories.

Fundamental analysts consider that buying stock in a company is buying a portion of that company. Value investors favor stocks where the market capitalization (value of all outstanding shares) is less than the liquidation value of the company. The premise behind value investing is that there is an intrinsic value; the analyst feels that the value of all shares should exceed the company’s liquidation value. Growth investors look at the company’s prospects on a going-forward basis. Growth investors look at products, market share, sales and marketing, and other factors to access the company’s ability to grow. Fundamental analysts also include investors buying stocks based on income stream, quality or other fundamental factors. Some fundamentalists merge or use pieces from several fundamental valuation approaches.

A quantitative analyst examines businesses from a strictly numerical standpoint. The premise behind quantitative analysis is that by using screens, or computer programs to rank stocks based on selected criteria, selection is made on a factual, non-emotional, basis. The basis of selection can be virtually any quantifiable variable. Analysts may use income, cash flow, historical prices, or virtually any other business or stock statistic, or combination of statistics, to establish their screens. A popular form of quantitative analysis is momentum investing, where investors screen for stocks which have recently outperformed their peer group.

A technical analyst creates charts which track the movement of specific stocks. The premise behind technical analysis is that investments move in patterns, and that these patterns can be predicted. Chartists look for stocks they feel have bottomed out and will therefore increase in price. These are the stocks they will seek to buy. Chartists also look for stocks they feel have reached their peak; these they will either sell or sell short. Technical analysis tends to involve short holding periods for investments, as the analyst will sell as soon as her chart indicates that the stock has reached a peak value.

Each of the three different approaches has its supporters. Each also has its critics. If there was one method of market evaluation which was clearly superior, then everyone would be using that method. The key to success in the market is finding what is effective for you, what information you feel comfortable using, and what seems to provide you with the best returns. The methods can also be combined, where one method is used to narrow down your selection, then another method is applied to select a specific investment. No matter what method an investor uses, investors generally do better when they have done their research.