What is equity analysis?
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By forlan
The listed company which trade shares in public is an interesting topic. The are so many books
who study about equity. The Investors are interesting in equity analysis because it could give us
so many return. The good analysis could predict which company could give multiple return. The
investor has invested money at the company and they
It is impossible that a bad company could give us high return. Garbage in, Garbage out.
Unfortunately, some bad companies looks very good. They often manipulate the financial
statement.
The equity analysis may disclose the real company condition. This analysis is also important not
only for investor but also other company.
There are two major equity analysis i.e. fundamental analysis and technical analysis. Both
analysis has different way. Fundamental analysis analyze the financial statement of company;
meanwhile, the technical just analyze the price movement.
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Fundamental analysis
The basic of fundamental analysis is intrinsic value. The intrinsic value is the present value of
dividend. The investor is happy, when the company give dividend. Only good company which
result high profit could give much dividend. The company which sale less few product or get
small profit may not pay you dividend.
The investor will analyze the financial statement of the company first. They may read the
financial statement careful including financial footnotes and contingencies.
The investor should be sure the money will be multiplied in share investment. The famous
fundamental analyses are ratio analysis and present value analysis. Compare the ratio a company
with the some industry company. For example, compare Bing with other search engine company
like Yahoo.
Present value approach try to calculate the expected dividend if the investor invest at a stock.
The analyst often analyzes the stock with dividend discount model. The dividend discount model
also calculate the interest rate that base on Fed rate.
The model also considers the growth of the company. The growth company should be calculated
and considered the production of company and the economic condition (macroeconomic).
The fundamental analysis also examine the industry of company. The industry are divided into
three stage i.e. growth stage, mature stage, and decline stage.
Every industry have different characteristics
Macroeconomic also affect market index and stock price. When economic condition is good, the
stock market is good too. Some macroeconomic indicator that usually has used is inflation,
budget deficit, currency, unemployment rate, Fed rate, etc.
The most famous ratio in financial ratio is Price Earning Ratio. The lower, the better. The lower
PER stock, meaning the cheap stock and reversely. PER measures stock price relative to earning.
Certainly, you should analyze the other ratio such as ROA, ROE, DER, etc. Same like present
value approach, you should compare the same industry company. Different industry also has
different characteristic that make the ratio value is less different. For example, a retail company
has higher ROA than a mining company.
Technical analysis
Unlike the fundamental, the technical analysis does not use financial statement data. They just
use historical data to analyze the share price movement. You can use histroical data from
Google or Yahoo. Use Microsoft excel or SPSS to make some stock price chart.
The analyst often use graphics for forecasting the stock price. That is why people call it chartists.
Chartists believe that the past stock price reflects the next stock price. The Chartist learn the
pattern of stock price movement. They could when to buy a stock or when to sell a stock. the
great chartist must be able to predict the stock movement accurately and get much money.
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Chartist uses statistical method such as moving average, hig low, ARIMA, etc. Some of their
forecast is precisely with the stock price today.
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Chartist prediction is for temporary or short term. Great investor like Warren Buffet does not
believe the chart. He said to select the stock with good fundamental could give you high return.
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Closing
We should analyze the equity comprehensively both technical and fundamental. Both analysis
make sure to invest in a stock.
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