Stock market investments can help individuals significantly increase their wealth. However, in order to make money with stock market investments, a person must have knowledge about stock market and know how to analyse companies before starting to invest.
In this article, we will discuss what the stock market is, how it can help investors grow their wealth, and fundamental and technical analysis.
Many investors have made a fortune with the help of their stock market investment. However, not having sufficient knowledge before investing can lead to wealth erosion. Hence, it is important to gain knowledge about the stock market in order to earn significant profits.
What is a Stock?
Stocks represent ownership in a company. They are also called equities or shares. Equity ownership represents that the shareholder owns a part of the company. The ownership depends on the number of shares held by the shareholder in comparison to the total outstanding shares of the company. For example, if a company has one million outstanding shares and a shareholder owns 100,000 shares of this company, then he/she has a 10% stake in it.
What is a Stock Market?
A stock market is a place where stocks can be issued, purchased, and sold. It allows investors to buy or sell ownership of a company’s assets.
The Importance of Stock Market
A stock market is very important for companies as well as investors. It allows companies to generate capital that they can use for their business. For example, if a company issues one million shares at a price of $10 per share, then this enables it to generate $10 million of capital.
While it allows companies to generate capital, a stock market also enables investors to earn profits by owning shares of a company. Primarily, there are three ways to earn returns from stock market-
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Dividends
There are companies that provide regular dividends to their shareholders. A dividend is the amount of money per share of equity that a shareholder owns.
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Selling Stocks
An investor can also earn money by selling their shares for a profit. For instance, if an individual has purchased a stock at $11 per share and the price rises to $22 per share, then he/she can sell that stock to gain profit.
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Trading Stock CFDs
Contracts for differences (CFDs) are a derivative product. They allow investors to speculate on financial markets, such as forex, commodities, indices, and stocks without taking ownership of the underlying assets. In case of a CFD, an investor is enabled to exchange the difference in the asset’s price from the point when the contract is opened to when it is closed. Speculation on price movement can be done in either direction.
Stock Market Analysis
It is important to analyse a company and the stock market before making an investment. This analysis can enable a person to understand the value of the company and its future performance. Fundamental and technical analysis helps a great deal in stock market investment journey. Fundamental Analysis
In case of fundamental analysis, the quarterly earnings release and other financial statements of a company are evaluated. Financial modelling helps analysts set estimates and gauge a company’s financial performance.
There are various factors that are checked during fundamental analysis, such as management quality, financial performance, etc.
Some of the important financial ratios of fundamental analysis are-
- Return on Equity (ROE)
ROE indicates how much a company earns on shareholder’s equity.
- Price to Earnings Ratio (P/E Ratio)
P/E ratio is used to compare the current market price of a share with the earnings per share. It indicates the price people are willing to pay based on the current earnings.
- Debt to Equity Ratio
This ratio allows investors to measure the riskiness of a company by comparing its total debt to its total equity.
Technical Analysis
Technical analysis is done to understand the stock prices of the past to predict the pattern of prices in future. It enables investors to check the share prices’ direction of movements. Technical analysis can help investors to identify if there will be a fall or rise in the share’s price. It is useful while trading in the stock market.
Technical analysis uses various charts like candlestick chart, bar chart, etc. to understand how stock prices are going to move. Furthermore, technical analysis can be very helpful in case of stocks that are in high demand and traded in substantial volumes.
Here are some of the most important technical analysis indicators-
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The Accumulation/Distribution Line (A/D Line)
The A/D line allows an investor to understand if money is flowing out or into a stock. If the A/D line is going up, then it indicates that new money is being invested in the stock. Thus, if the ratio is going down, then money from the stock is being taken out.
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Head and Shoulders Pattern
The Head and shoulders pattern indicates changing trends. This pattern forms when a stock’s price reaches a peak and declines to the price before it went up. After that, the price reaches above the initial peak and declines to the base price. Finally, the stock price rises back to the initial peak and falls to the base price. If a stock is developing this pattern, then it indicates that future selling might happen.
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Moving Average Convergence/Divergence
The MACD is one of the most-used technical indicators. It indicates the momentum of a stock and helps to understand its future movement.
The MACD compares the two moving averages. These averages can be set for any duration. Generally, a stock’s 12-day and 26-day moving average are used. In case the short-term line crosses under the long-term line, stock selloff can be expected. However, if the short-term line stays below the long-term line and then crosses above it, then it indicates that the stock will trade higher.
Why Knowledge of the Stock Investments and Their Analysis is Important
While many people tend to purchase stocks that are very popular, they might lose money if they haven’t done their research. Hence, to earn significant profits from the stock market, an investor needs to understand the stock and analyse it before investing. People can also take help from their stock market consultant to make the right decisions.
