Ever wonder how some investors consistently pick winning stocks? It’s not magic — it’s strategy. Imagine choosing a stock like picking the perfect banana. You inspect a whole bunch until you find one that’s just the way you like it, with the right size, color, and ripeness. Similarly, analyzing stocks means looking at a company's health, performance, and potential. Keep reading to learn about stock analysis tools and techniques so that you can confidently choose the right stocks for you.
For investors, stock analysis is a way of inspecting investments before you buy them. It helps you choose investments that fit your goals and stay away from ones that don’t. Evaluating a company's performance and potential also ensures that you’re putting your money where it can grow most effectively.
Set your selection criteria
Consider company fundamentals, market trends, and growth potential.
Remember to diversify
Spread your investments across industries and regions to reduce your risk.
Know your priorities
Align your stock choices with your personal risk tolerance and investment goals.
Look at the big picture
Consider how various sectors are performing based on the general economic conditions.
There are many types of stock analysis, but they’re broadly classified into two categories: fundamental analysis and technical analysis. Some hybrid methods combine both approaches. Here's an overview of the major types of stock analysis:
Fundamental analysis
Think of this type of analysis as looking at the health of a company. In fundamental analysis, you're checking how well the company is doing overall, including its profits, debts, and what it owns. If this sounds complicated, don't worry — we explain most of the metrics below or over on our blog.
Key parts of fundamental analysis:
Financial statements: If fundamental analysis is like an annual physical at the doctor, financial statements are like the company's medical test results. They show how much money it's making (income), what it owns and owes (balance sheet), and how much cash it's bringing in (cash flow).
Ratios: These are simple numbers that show things like how much the stock costs compared to the company's earnings or book value. Common financial ratios like price-to-earnings (P/E), price-to-book (P/B), and return on equity (ROE) are used to compare stocks and assess company performance.
Industry and competition: This type of analysis includes checking how the company is doing compared to its competitors or within its industry.
Technical analysis
This type of analysis is like reading a stock's "mood" based on its past price movements. In technical analysis, you're not focusing on how well the company is doing, but how the stock’s price is moving up and down in the market.
Key parts of technical analysis:
Sentiment analysis
With sentiment analysis, it’s all about how people feel about the stock. If most people are feeling good about a stock, its price might go up. If they're worried or negative, the stock price might drop.
Key parts of sentiment analysis:
Growth vs. value analysis
This is a hybrid approach that can involve both fundamental and technical analyses. It’s based on the concept that there are two different basic categories of stocks:
Top-down vs. bottom-up analysis
Again, this is a hybrid approach to analysis and follows a specific concept. It defines two different ways that investors decide which stocks to buy:
Behavioral analysis
Similarly to sentiment analysis, this is about understanding how people make decisions in the stock market. Sometimes, people don’t act rationally — for example, they might panic and sell stock even if it’s in a good company. Behavioral analysis tries to take advantage of these emotional decisions.
Earnings analysis
This type of analysis focuses on how much profit a company is making. Investors pay attention to whether a company’s earnings are growing and whether they beat or fall short of analysts' expectations, which can cause the stock price to move up or down.
As you can tell, there’s no one-size-fits-all approach to analyzing stocks, and each one gives you different insights. Some people prefer to focus on the company’s financial health and use fundamental analysis. Others do technical analysis to look at patterns in stock prices, or rely on a combination of methods to make decisions. If you’re a beginner, you might want to test out a few approaches to see which one is the most useful for you!
- Economic picture: In fundamental analysis, you also look at things like interest rates, inflation, or economic conditions that could affect the company's future.
- Valuation: Based on all the other information, the last step is trying to figure out what the stock is really worth. This includes using methods like discounted cash flow (DCF) analysis, the dividend discount model (DDM), and earnings power value (EPV) to estimate a stock's intrinsic value.
- Price charts: These show how the stock's price has moved over time, helping you spot trends.
- Moving averages: A moving average is a way of smoothing out price data to more clearly see the overall direction the stock price is headed.
- Support and resistance levels: These levels are the prices where the stock tends to stop falling (support) or rising (resistance).
- Indicators: This includes tools like the relative strength index (RSI) or moving average convergence/divergence (MACD) that show if a stock is being bought or sold a lot.
- Patterns: Common shapes like triangles or head-and-shoulders patterns on the analysis chart can hint at what might happen next to the stock’s price.
- News: Articles or headlines might suggest something about the stock or the company. Social media: Posts on platforms like Twitter (X) or Reddit can indicate how people are feeling about a certain stock or company.
- The “fear index”: Investor sentiment is so important that some groups have developed tools to show how scared or confident people are about the market overall.
- Growth stocks: These are shares in companies that are growing fast. Their stock prices are usually high because people expect them to keep growing. Growth stocks often have high P/E ratios.
- Value stocks: These are shares in companies that seem "cheap" compared to how much they're actually worth. Investors believe that value stocks are undervalued and could be a good bargain. They often have low P/E ratios or strong dividend yields.
- Top-down: You start by looking at the big picture, like how the overall economy or a certain industry is doing, and then pick your stocks.
- Bottom-up: You focus on the individual company first, checking its health and potential, before worrying about the bigger picture.
Long-term investors typically rely on fundamental analysis to assess a company’s overall performance and potential.
Traders use technical indicators to quickly spot entry and exit points based on market trends and volatility.
Many investors combine different types of analysis so that they can be more accurate when making decisions.
Market sentiment and external economic factors are also important and should be part of any analysis.
Stock valuation methods help investors figure out what a stock is worth. This can guide their decisions about whether to buy, sell, or hold that stock. There are several common methods used to estimate the value of a stock, and each one has its own strengths and weaknesses. Here’s an overview of the key stock valuation methods, with simple explanations of each one:
Discounted cash flow (DCF) analysis
DCF is one of the most widely used stock valuation methods. The idea is to estimate how much cash a company will generate in the future and then figure out how much that future cash is worth today.
How it works:
You predict the company's future cash flows for several years.
You "discount" these cash flows back to their value today (because inflation means that one euro today is worth more than one euro in the future).
You add up the discounted cash flows to get the stock's intrinsic value.
If the intrinsic value you calculate is higher than the current stock price, it may be a good buy.
When to use it:
DCF works best for companies with stable cash flows, like mature businesses.
Price-to-earnings (P/E) ratio
The P/E ratio is a simple way to value a stock by comparing its price to the company's earnings.
How it works:
P/E ratio = stock price / earnings per share (EPS).
A high P/E means investors expect high future growth, while a low P/E might indicate the stock is undervalued.
When to use it:
P/E is popular because it’s easy to calculate. It's most useful for comparing companies in the same industry, but it doesn’t work as well for companies that don’t have earnings, like new startups.
Price-to-book (P/B) ratio
The P/B ratio compares a stock’s price to the company's book value, which is the value of its assets minus its liabilities.
How it works:
P/B ratio = stock price / book value per share.
A ratio below 1 might indicate the stock is undervalued, because the company’s assets are worth more than its stock price.
When to use it:
P/B ratio is useful for valuing companies that have a lot of physical assets, like banks or manufacturing companies.
Dividend discount model (DDM)
The DDM values a stock based on the dividends a company pays to its shareholders. It assumes that the value of a stock is the present value of all its future dividends.
How it works:
You estimate future dividends and discount them to their value today, similar to the DCF method but focusing only on dividends.
When to use it:
The DDM is useful for valuing companies that consistently pay dividends, like utility companies or large, stable firms.
Price-to-sales (P/S) ratio
The P/S ratio compares the stock price to the company's revenues (sales).
How it works:
P/S ratio = stock price / revenue per share.
A lower P/S ratio might mean the stock is undervalued compared to its revenue.
When to use it:
The P/S ratio is often used for companies that don’t have earnings yet, like early-stage tech companies, and where traditional measures like P/E don’t apply.
Enterprise value to EBITDA (EV/EBITDA)
Winner of the prize for longest acronym, the EV/EBITDA method compares a company's enterprise value (which includes its debt) to its earnings before interest, taxes, depreciation, and amortization (EBITDA). It’s often used in mergers and acquisitions.
How it works:
EV/EBITDA = (market capitalization + debt - cash) / EBITDA.
A lower EV/EBITDA ratio might indicate the company is undervalued.
When to use it:
EV/EBITDA is useful for comparing companies with different levels of debt and for industries where earnings fluctuate a lot.
Relative valuation
In relative valuation, instead of trying to calculate the intrinsic value of a stock, you compare it to similar companies.
How it works:
You use ratios like P/E, P/B, or P/S to see how a company is valued compared to others in the same industry.
If one stock has a lower ratio than its peers, it might be undervalued.
When to use it:
Relative valuation is quick and works well when you’re looking at similar companies in the same sector.
Gordon growth model
The Gordon growth model is a type of dividend discount model. The key difference is that this model assumes the company’s dividends will grow at a constant rate forever. It’s useful for valuing companies that pay consistent dividends.
How it works:
Stock value = dividend per share / (required rate of return – dividend growth rate).
When to use it:
The Gordon growth model works best for mature, stable companies that have a reliable dividend payout and a steady growth rate.
Residual income model (RIM)
The RIM focuses on a company’s ability to generate profits above its required return on equity. It’s a more complex version of DCF that accounts for value beyond basic profits.
How it works:
You calculate the company’s residual income (income beyond the cost of capital) and use it to determine the stock's value.
When to use it:
The RIM is good for companies where earnings or dividends aren’t stable, but you need to do more complex financial modeling.
At the end of the day, no single method is perfect. Many investors use a combination of these techniques to get a more complete picture of a stock’s value.
Make sure the broker is regulated by reputable financial authorities, such as the BaFin in Germany.
Compare the commission rates for buying and selling stocks — some brokers offer commission-free trading.
Check that the broker offers the types of investments you’re interested in, such as stocks, ETFs, mutual funds, options, bonds, and more.
If you’re a beginner, choose a broker that has educational resources such as webinars, tutorials, and articles.
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- Very accurate and considers cash flows
- Complex and relies on multiple assumptions
- Ideal for dividend-paying companies
- Not suitable for high-growth firms
- Simple and quick to use
- Doesn’t consider long-term trends
- Objective
- Overlooks future potential
- Useful when benchmarks are available
- Dependent on comparable data
- Check the company's fundamentals. Dive into its financial health, business model, and growth potential.
- Study chart patterns and price movements. Use technical analysis to identify trends and key levels.
- Evaluate the market environment and industry trends. Understand external factors that could influence the stock’s performance.
- Assess the stock’s valuation. Determine if it’s over- or undervalued.
- Make your decisions, monitor your portfolio, and adjust as needed. Investing is an ongoing process!
Fundamental analysis looks at a company's financial health, management, and industry position to determine its value. Technical analysis looks for patterns and trends in historical price and volume data, often using charts and statistical indicators.
For long-term investors, fundamental analysis is usually a good fit. This approach focuses on evaluating a company’s true value by analyzing financial metrics, business models, management quality, and market conditions. The goal is to identify stocks with the potential for long-term growth.
Long-term investors can also benefit from specialized stock analysis tools. These tools provide access to large databases of financial metrics, fair value assessments, and forecasts for numerous companies. They help investors pinpoint undervalued stocks and make well-informed decisions.
Technical analysis takes a different approach by focusing on shorter-term price movements. That makes it a good approach for traders who buy and sell frequently, but less useful for investors who are playing the long game.
When analyzing companies and their financial metrics, there are a few key indicators you should focus on. These metrics help you assess a company's financial health and make solid decisions. Here are some of the most important ones to consider:
Profitability: These metrics show how efficient a company is at generating profits. Key indicators include net profit margin, return on equity (ROE), and return on assets (ROA).
Liquidity: Liquidity ratios assess if a company can meet its short-term obligations. Common examples are the cash ratio and the current ratio.
Debt: These metrics evaluate how much debt a company has taken on and the risks associated with that debt. Examples include the debt-to-equity ratio and interest coverage ratio.
Growth: Growth metrics indicate whether a company is expanding over the long term. These include revenue growth and profit growth.
Valuation: These ratios help you determine whether a stock is fairly priced in relation to its value. Examples include the price-to-earnings (P/E) ratio and price-to-book (P/B) ratio.
Efficiency: These metrics highlight how effectively a company uses its resources. Examples include asset turnover and inventory turnover.
Technical analysis can be a powerful tool, especially for making short-term trading decisions. But it’s important to keep in mind that fundamental factors can override technical patterns at any time. Combining both approaches is usually the most effective way to make well-informed and reliable decisions. If you plan to rely solely on technical analysis, it’s crucial to develop your skills and be disciplined about your trading habits.
There are different valuation methods for calculating the intrinsic value of a stock, often referred to as its "true value." The goal is to estimate a company's actual worth and the value of its shares, independent of whatever their current price is on the market.
Discounted cash flow (DCF)
The price-to-earnings (P/E) ratio is one of the most popular metrics for evaluating a stock’s value. It shows the stock price in relation to the company’s earnings — or in other words, how much investors are willing to pay per euro of profit.
Technical analysis is a popular method used to make investment decisions in the stock market. It studies historical price movements and trading volumes to predict future price trends. Rather than examining a company’s fundamental data — like revenue or earnings — technical analysis only looks for patterns, trends, and indicators within price charts.
This approach works well for interpreting price movements in financial markets and making informed trading decisions. It’s particularly useful for short-term traders, but long-term investors can also pair it with fundamental analysis. Even though it’s “technical,” interpreting charts and indicators can be as much an art as it is a science — so it takes focus, patience, and experience to do it well.
Investors often use market analysis to identify overall trends in the stock market. This approach falls under the umbrella of technical analysis and takes a broad view of the entire market to determine its current phase or direction. It's often linked to concepts like market sentiment and trend-following strategies.
In stock analysis, the term "overweight" means that there’s a positive outlook on a particular stock, sector, or asset class. Analysts or portfolio managers use it when they expect an investment to outperform other comparable options or a specific benchmark index.
Evaluating stocks with variable growth rates involves analyzing a company's future earnings, dividends, or cash flows, which may grow or decline at different rates over time. This approach is particularly useful for companies in their early stages, where rapid growth is common but eventually stabilizes to a more sustainable pace.
Stock valuation is the process of determining a stock's true value, also called intrinsic value. The goal is to figure out whether a stock is overpriced, underpriced, or fairly valued compared to its current market price. This helps investors make informed decisions about whether to buy, sell, or hold a stock.
Analyzing stocks effectively is usually a blend of fundamental analysis, technical analysis, and assessing the broader market conditions. Here’s a structured approach you could take to thoroughly evaluate a stock: