Home » Guides » How To Analyze A Stock

How To Analyze A Stock

By Dave

Last Updated

Advertising Disclosure

Understanding how to analyze a stock is essential to making profitable trades. With stock analysis, traders can identify whether or not a stock is poised to make gains in the short or long term, as well as identify potential entry and exit points. While traders may vary in the level of detail and the goals of stock analysis, this is a practice that should be standard before, during, and after every trade.

Why Do You Need to Analyze a Stock?

When trading individual stocks, risk is extremely high. While a portfolio may hedge against losses in a particular stock market sector, it is much more difficult to hedge against losses from a poorly chosen position.

Stock analysis can dramatically increase the probability of profiting from a position by ensuring that traders open positions with their heads rather than their hearts. By carefully analyzing a stock before trading, traders can determine whether that stock is poised for a gain and the magnitude of that potential gain. Stock analysis can also help traders evaluate the potential risk, including the magnitude of potential losses, associated with any given stock.

Stock analysis also helps traders to separate out trends from noise. A particular stock may go up and down in value, but without careful analysis it is difficult to know what price movements are part of normal volatility, what movements represent large corrections, and what movements are in line with profitable expectations.

Analyzing a Stock: Technical vs. Fundamental Analysis

Stock analysis can be broken down into two overarching categories: technical analysis and fundamental analysis.

Technical analysis is typically considered the approach to use over short timescales, on the order of weeks, days, or even shorter periods. This type of analysis focuses on using charts to identify trends in price movements and predict likely near-term moves in the value of a particular stock. Technical analysis is a mix of art and science, as there are a nearly infinite number of ways to approach a stock using technical analysis methods.

Fundamental analysis, on the other hand, is considered a longer-term approach for examining a stock’s value. Fundamental analysis typically involves looking at the underlying financials of a company, including factors like revenue, expenses, and debt, as well as future growth opportunities. In the most extreme applications of fundamental analysis, traders assume that a company’s future earnings based on its bottom line is the primary guide for what a stock is worth.

How to Analyze a Stock

Analyzing a Stock Using Technical Analysis

Technical analysis is a catch-all term for the suite of tools and strategies used to predict short-term movements in the price of a stock. As such, there is a virtually endless number of methods that fall into the category of technical analysis. However, there are a handful of strategies that form the basis of much of technical analysis.

Stock charts are one of the most prominent features of technical analysis, and they form the base for most secondary analyses. With a stock chart, traders can quickly visualize the history of price movements of the stock being analyzed. Stock charts also have the advantage of being highly customizable, so traders can look at different timescales or different stocks without fundamentally changing the visualization.

Yahoo Finance Premium Charts

Charts also allow traders to perform in-depth analyses, such as identifying the current trend in a stock’s price. One of the most common methods used by traders to do this is to simply plot a moving average of the price over some number of past intervals. If the stock is generally trending upward in value, the moving average will have a positive slope and it will be easy to see the upward movement displayed as a trendline. Moving averages will also make it easy to spot when a stock’s price is falling over time.

On top of moving averages, charts allow traders to draw their own lines. These can be used to connect two or more points in time, potentially to identify a trend. Alternatively, hand-drawn lines can allow traders to visualize price levels where a stock meets resistance – it climbs up to that point and then falters and drops – or support – a price floor that the stock repeatedly bounces off of. When zones of support or resistance are broken, that is often (but not always) an indicator that the stock in question is about to experience a large price movement.

Finally, traders can use technical analysis to assess volatility, or the amount by which a stock’s price changes inside of any broader trends. A stock that is more volatile is often considered to be more risky, since there is a higher chance that the price will experience a large swing after entering a position. Volatility can change over time depending on broader market conditions, so even when a broader trend remains constant traders can experience increased risk from a rise in volatility.

Analyzing a Stock Using Fundamental Analysis

Fundamental analysis focuses on the financial aspects of the company underlying the stock. Over the long-term, strong financial health at the corporate level should lead to greater profits, which in turn leads to higher stock prices.

🏆 Top Rated Services 🏆

Our team has reviewed over 300 services. These are our favorites:
📈  Best Day Trading Service
Investors Underground
🎯  Best Stock Scanner
Trade Ideas
📉 Best Stock Charts
💰  Best Stock Picking Service
Motley Fool
📱  Best Mobile Broker
📊   Best for Stock Research
Seeking Alpha

In its most essential form, fundamental analysis involves estimating the value of a company based on the business it is doing. That means looking through revenue and profit statements, which reflect how much money the company is bringing in and how much it is keeping after expenses. The profit is particularly important, as this is used to calculate the earnings per share of a stock – the number that most directly relates to the intrinsic value of a stock in the eyes of many fundamental traders. Earnings per share is calculated as the company’s profits divided by the number of outstanding shares.

Ally Invest Fundamentals

Of course, a company’s liabilities are just as important in the long run. It’s important to look at a company’s cash flow statements, since these get into the heart of how money is moving through the company and whether current profit margins are sustainable. A company’s debts may also present warning signs about the future financial health of a company. It is important to determine whether a company has enough cash on hand in order to cover its outstanding debts without falling into financial crisis.

The price to earnings ratio is a ubiquitous indicator in the world of fundamental stock analysis. The P/E ratio, as it’s known, is the ratio of a stock’s price to the earnings per share. Comparing the P/E ratios among competing companies in the same sector is a good way to determine if a company’s stock is overpriced relative to it’s long-term value. Additionally, the P/E ratio can be used to determine if an entire industry sector is overpriced relative to its historical value, which may be a sign of a bubble in stock prices within that sector.

For industrial companies with a large number of physical assets, book value can also be an important indicator of financial health. Book value is simply the total net worth of a company, or the value of its assets minus all of its debts and liabilities. Comparing the book value per share to the company’s market value can be one way to identify undervalued companies – if the book value is lower than the market value, that means that the market believes that the company will be worth less in the future than it is at present. If the market turns out to be wrong in this prediction, traders can use this as an opportunity to buy a stock at a bargain price relative to its long-term value.

Finally, the price/earnings-to-growth (PEG) ratio can be an important indicator of where a company’s value is headed. PEG is calculated as the stock price divided by the earnings per share, divided by the growth in earnings over some time frame (usually one to three years). A low PEG ratio compared to the broader sector indicates that a stock is undervalued relative to the anticipated future growth of the company. Typically, a PEG ratio less than one means that a company’s stock is undervalued, while a PEG ratio greater than one means that a company’s stock is overvalued. Keep in mind, though, that PEG ratios can vary depending on what timeframe is used to calculate earnings growth and that earnings growth outlooks can have a major impact on the relevance of the PEG ratio.

Combining Fundamental and Technical Analysis

While it’s possible to use either fundamental or technical analysis alone, the two analysis methods can be combined to achieve a sound a profitable investment strategy. Fundamental analysis can be used to identify stocks that hold long-term value and profit potential – essentially, which stocks are worth trading.

Once a candidate stock has been identified using fundamental analysis, traders can use technical analysis to determine entry and exit points in the short-term – when, or at what price, it is best to trade that stock. Technical analysis can also help traders determine how to protect themselves with stop-loss orders, while a mix of technical and fundamental analysis can inform at what price to set profit targets on a position.

Refer to the Analysts

Professional stock analysts often make some or all of their stock analysis available to the public, or to a base of paid subscribers. It’s worth keeping an eye on what stock analysts have to say, as most respected analysts have a history of being right more often than they’re wrong. Analyst opinions can help confirm analysis that has already been done, or identify blind spots that your own technical or fundamental analysis missed.

ameritrade analyst reports

However, it’s important to take analysts’ predictions with a grain of salt. Analysts often contradict one another or interpret fundamental and technical indicators differently. No analyst is perfect at predicting the stock market in the short-term or the long-term. So, it is best to use analyst opinions as a supplement to fundamental and technical analysis, rather than as proclamations of definitive truth.

Planning Your Trades and Investments

Planning your trades and investments is critical for traders looking to develop not just a single winning position, but an entire portfolio of them. Rather than simply buying a stock and hoping for the best, it is important to have a complete strategy before placing a trade. Ideally, this strategy and the rationale behind it should be written out so that it cannot be easily ignored once a trade has been placed and emotions become involved.

This means that, once a potential stock trade has been identified, it is important to use a mix of fundamental and technical analysis to first identify entry conditions. That may be a single price level based on technical analysis, or it may be a technical pattern that develops. At the same time, traders should use stock analysis to identify a target profit price on the stock, or to identify technical or fundamental indicators that warranty selling some or all of the position. Finally, traders should enter every trade with a trailing stop-loss in place, which may be set at a specific price or at a percentage loss.


Understanding how to analyze a stock using technical and fundamental analysis is critical to identifying and executing profitable trades. Fundamental analysis can help traders identify potentially undervalued stocks, while technical analysis can be used to identify entry and exit points in the short term. By applying stock analysis before making trades, traders and investors can manage their risk, increase their profitability, and enter every position with a defined trading plan.

Day Trade Review


Dave has been a part-time day trader and swing trader since 2011 when he first became obsessed with the markets. He focuses primarily on technical setups and will hold positions anywhere from a few minutes to a few days. Over his trading career, Dave has tried numerous day trading products, brokers, services, and courses. He continues to test and review new day trading services to this day.

Leave a Comment