How to do an analysis of stock market to make bigger returns?

Last updated on: May 17, 2020

Analysis of stock market to make bigger returns

With every next person is endeavoring to invest in the burgeoning stock market, the incidences of substantial gains and loses are on the higher side. According to stock market experts, the first and foremost reason behind the paradigm shift in the lack of market knowledge and shortage of analysis before making any such investment.

Whether you’re indulging in the stock market for quite some time, or you’ve just started, having a strong knack in analysis could give you a competitive advantage in the domain. And when it comes to doing a thorough analysis, there are lots of things that must be taken into consideration. Do keep in mind that it is a jot that can’t be perfected overnight on a week. In most of the cases, it takes several weeks or even months to hold a strong grasp on stock market analysis.

What things to look at?

Do understand that stock analysis is a step-wise process that needs to be followed in accordance to the set criteria. Primarily, there are two approaches to stock analysis – top-down strategy and bottom-up approach. In the first approach, we first choose a particular industry and look for best performing stocks whereas in the second approach, we first choose a specific company and then gain the insights about the ruling industry. It is all up to you which approach you decide to go with. However, you should make sure that process moves smoothly. Let’s take a deeper look at this process below.

Industry analysis

When it comes to checking the performance of any industry, the most preferred way is to look at the annual report of a company. If possible, look at the reports from the leading companies in that industry to get a present and future outlook. Annual reports are meant to tell a lot about the major and minor competitors in a specific industry. Concurrently analyzing the annual reports of two or three companies should give a precise idea about the industry. You can also subscribe to trade magazines and websites that resort to a particular industry for checking the latest industry happenings.

Business Model Analysis

In this type of analysis, a company’s strength and weaknesses are seen. There can be a good company in a poor industry and a poor company in a promising industry. The strengths of a company are often judged by various things like its distinctive brand identity, products, customers, and suppliers. You can learn about a company’s business model from its annual report, trade magazines, and websites.

Financial position

Whether you believe it or not, determining the financial strength of a business is the most important step in analyzing a stock. Without having proper knowledge about the financials, you cannot really think like an analyst. You should be able to read a company’s balance sheet, income statement, and cash flow statements. Sometimes, figures mentioned in the financial statements tell a lot about the company than the fancy wordings of an annual report. If you’re not easy with understanding numbers, and you want to study stocks, the best time is today to start learning and getting easy with them.

Quality Management

In order for an insightful stock analysis, considering quality management is also very necessary. It is often thought that there are no good or bad firms, only good or bad leaders. Key executives are held accountable for the future growth of the company. You can assess company management and board quality by carrying out a detailed research on the web. There is a hell lot of information is available on web about almost every public company.

Growth Monitoring

Stock prices largely depend on the earnings, therefore, in order to know whether a stock price would be going up or down in the coming future, it is necessary to understand where upcoming earnings are moving. Inappropriately, there is no set formula that can tell you what to foresee for future earnings. Analysts make their own estimates by analyzing historic figures of sales growth and profit limits, along with growth trends in that specific industry. It’s essentially judging what has happened in the past to what’s supposed to happen in the future. Making precise earnings predictions is the real test of your stock analysis competences because it’s a clear indication of how impressively you understand those industries and businesses.


After you gain an understanding of future earnings, the next stage is to determine the actual worth of a company. What should be the worth of your company’s stock? Analysts are supposed to find out how much the current market price of the stock is defensible in comparison to the company’s value. There is no “precise value,” and different analysts make the use of different parameters. Value investors look at inherent worth whereas growth investors stare at earning capability. A company selling at a higher P/E ratio must rise at a higher price to defend its running price for growth investors.

Target Price

The eventual step is to define a target price. Once you gain knowledge about future earnings, you can determine a high and low target price by increasing estimated earnings per share (EPS) with the projected high and low P/E Ratio. The high and low target price is the price range within which the future stock price is supposed to shift in response to the probable future earnings. Once you determine the target price, you can efficiently use it to reach your destination.

The Final Verdict

As every investor wants to generate profit, there is no set formulate to ensure the same. In order words, don’t just blindly follow that stock market analysts and other investors have to say. Use your own intellect and pay close attention to industry happenings through various means and make a sound decision.

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