How to study stocks is an age old question in the market. Some people advocate in favor of fundamental analysis, while others support the use of technical analysis. It’s more like how guys always think their car is better than their friends’- it’s just that you have driven your car for a long time now and you have learned more about it. People who have used any of the above methods long enough, know how to reap maximum benefits from it.
Studying annual and quarterly reports of companies, is considered the best way to analyze a stock by many people. Well, my experience has shown that being aware of the stock’s price range, is also key.Companies with strong financials have found to be stagnant in the market time and again. At the same time, we see them falling in price, whenever the market goes down. Knowing the direction of prices for potentially good or even great companies seems to help. This is in relation to the perceptions of market participants. Highly enthusiastic investors in rising markets, lose their enthusiasm to fear during falling markets. Even those who call themselves long term investors, act like amateur traders when the indices fall by 20%. The average investor is not Warren Buffett, so noticing trends in prices can facilitate better decisions.
Many investors have been found to buy up shares of companies that are traded at their lowest in a year. The Gujarati investors follow a totally opposite dynamic- they buy stocks that have crossed their highest price in a year. The latter believe that a consistently falling stock price implies that the investors have lost their faith in the company. Buying such stocks will only let your money stagnate, with no significant rise in prices.
Although the discussion and taking sides continue, I have always found that adopting a Techno-Fundamental approach, where we take parts of both fundamental and technical analyses, to be convenient. Companies that consistently grow in net worth and assets with limited liabilities and a growing market share, are the ones that can be called good companies. We can notice quality companies from their track record for the last 5 to 10 years. At the same time, also look at the direction of the stock price. This is the easiest method for stock picking. You can see the opening price, highest price, lowest price and the closing price of stocks- the most important one being the closing price.
The closing price shows us the current direction of the stock price. Only stocks that have the investors’ faith will close at a higher price. Compare closing price with that of the previous day. Closing prices at the end of weeks and months can be compared thus. And this is how we know whether the market sentiments are in favour or not.
As you might have noticed, all the methods discussed above are very simple. Now, if we look at these techno fundamental parameters before investing, it can guide you towards wealth creation.