Depending on the position you have in the market, the kind of analysis you need to undertake also differs. It takes a considerable amount of time to reach a state where it becomes easier to operate in the Capital Market, but for investors in the market must focus on certain key attributes to be analyzed, which can be broadly divided into Fundamental Analysis and Technical Analysis.
An Investor should chiefly focus on Fundamental Analysis and then Technical Analysis. Whereas a trader would primarily need to look into Technical analysis and then Fundamental Analysis.
Let’s understand Capital Market Analysis Better:
The objective of fundamental analysis is to find the worth of a Company by inspecting the Company’s financials, understanding how the company is currently performing in its industry by assessing its financial attributes, along with certain micro and macro-economic factors.
The Analysis of a Company’s financials necessarily must include:
One of the important factor to analyze a company’s performance is its sales. A growing company keeping up with latest trends, technology, product mix and such other like factors, is bound to have a growing Sales rate. Sales –
A company reporting a growing sales rate should normally report higher growth in profits and dividends at a higher rate every year. Dividends received by a shareholder is paid out of the Profits of the Company. (Note: Companies may opt not to pay dividends depending on Company Policy; but the analysis tends to achieve the conjecture) Profits Made –
This determines what part of the total sales the company retains with itself as its earnings. It is expressed as a percentage. For instance, if the company makes INR One Lakh (Rs. 1,00,000/-) in Sales, having a profit margin of 20%, then the company earns a net income of INR Twenty Thousand (Rs. 20,000/-). Constantly rising Profit Margins suggests how well the company is run by the Management, its leadership efficiency in decision making and such like factors. There are two types of profit margins, namely: Profits Margin –
i.Net Profit Margin: which shows how much revenue is left after all expenses have been deducted from sales (NPM=Net Income/Net Sales); and
ii.Operating Profit Margin: which shows how much revenue is left after operating expenses have been paid and what proportion of revenue is left to cover non-operating costs. (OPM=Operating Income/Revenue)
This ratio represents the ratio between the amount of debt the company uses to finance its assets and the amount of value represented in shareholders’ equity. The lower the ratio, the better the company is doing its business. With a higher debt-equity ratio, the company has an obligation to pay higher debts, making the company prone to a greater liability. Debt-Equity Ratio –
Market share represent the percentage of the market’s total sales earned by the company. A company having a higher and a growing rate of market share represents an apt growth in the number of customers serviced by the company, which signifies that the Company is well perceived by the customers in the market and is likely to remain so. Market Share –
Now that you have understood how to analyze the financials of a company, let’s dig deeper. Apart from the financials, certain Micro & Macro-economic factors also determine the performance of the company. They include:
Micro-Economic Factors are factors that position the Company in its relevant market. It includes the following elements:
Stakeholder Relations; refers to the effectiveness of the Company in maintaining a stable relationship with all its stakeholders namely, Customers, Employees, Shareholders (owners)- the dividend, bonus etc. given, Creditors and the like.
Market Position; refers to the position of the Company in the market with respect to its competitors in terms of Product Mix, Technology devised in operations, market capitalization, customer base and the like. Companies performing well have an excellent product mix for their customers, keeping up with current and future needs using state-of-the-art technology
are factors that affect the position of the Company due to the presence of external forces. It includes the following elements: Macro-Economic Factors
Government & Legal Policies; refers to the policies introduced which have a bearing on the working of the company. This may include Tax Policies, Annual Financial Budget, Statutory implications and the like.
RBI Rates: refers to the Repo & Reverse Repo Rates of the RBI. This affects the borrowing capacity of the Company. With a lower Repo Rate, Companies can borrow funds at a lower interest rate, and thus reducing their debt risk.
Market Indicators; refers to various growth indicators in the market which enable an investor to determine the company’s position in the industry and economy. These include:
(i)Gross Domestic Product (GDP) – monetary value of all goods and services produced over a period of time;
(i)Index of Industrial Production (IIP) – index of growth of various sectors in the economy;
(i)Inflation – rise in prices of goods and services and subsequent fall in purchasing power of currency
These indicators depict how the economy of the country is in general and which sectors are preferable to invest.
With that, you have completed how to carry out the fundamental analysis of a company. This would ideally help you choose the companies to invest in. But that alone won’t help you operate in the market. You also need to know when to buy and when to sell these stocks too. So let’s get ahead with Technical Analysis.
The objective of technical analysis is to use market data to identify market trends and predict future prices, which helps to determine whether it is ideal to Buy, Sell or Hold a particular stock. It involves understanding the movement of stocks in the market through various technical analysis tools. However, neither is technical analysis a foolproof hack into the market, nor is it 100% accurate. It rather provides a better understanding and insight as to which stock is likely to perform better in the market in future. Technical Analysis Tools Include:
Analyzing the share price and volume charts of the Company is an important element of Technical Analysis. This includes the liquidity volume of the share and such other factors like Price Data Analysis over a particular timeframe. Share Price & Volume –
Analyzing trends and patterns from various technical charts and graphs to determine the position of the stock in the market. Trend Analysis -
Using tools such as trend-lines, moving averages and momentum indicators to forecast stock price movement in the market. Technical Indicators –