How do you analyse stocks?

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There are two main types of analysis, namely fundamental analysis and technical analysis.

The fundamental analysis assesses the intrinsic value of a stock by examining all factors which can affect the security value. These include macroeconomic (e.g. the economy and industry) and microeconomic factors (e.g. financial performance, management). The objective is to arrive at a value that an investor can compare with its current price. Undervalued? Buy. Overvalued? Sell.

Fundamental analysis focuses on the company’s financial statements. It uses revenue, earnings, future growth, ROE, profit margins and other data to determine a company’s underlying value and potential for growth. One of the most famous and successful fundamental analysts is Warren Buffett.

Technical analysis focuses on price movement patterns, trading signals and other analytical charting tools to evaluate a security’s strength or weakness. Generally, people will use chart pattern software with indicators such as MACD, Bollinger Band, RSI, EMA and others. The indicator used is up to the user’s preference as there are many indicators available. People who use technical analysts are also referred to as chartists.