Basic Stock Analysis

Learn to evaluate stocks.
Learn to evaluate stocks. (Image: stock chart with a pencil mark image by Dmitriy Lesnyak from

Basic stock analysis requires three steps. The first is to collect historical records of price and balance sheet information and to manipulate the data so it can be compared over time. The second form of analysis looks to compare trends of companies in the same industry. Finally, you must examine the broad stock market outlook and compare the strength of the company and industry to the broad market.

Collecting Data

Balance sheet data is reported quarterly by companies trading on major exchanges. Information may be obtained by contacting the company directly or through the U.S. Securities and Exchange Commission website. Data is also available from several free and subscription web services. Using the balance sheet, investors should collect measures of cash flow, market share, capitalization (the sum of debt and equity used to maintain the company) and historical growth trends. In addition, closing price and volume data should be collected and corrected for stock splits and special dividend declarations. This information is also available from free and subscription Internet sources.

Balance Sheet Analysis

Convert balance sheet data into popular ratios such as price-to-earnings (closing stock price divided by reported earnings), dividends-to-cash flow (dividends divided by income minus operating expenses) and asset-to-liability (all assets minus all liabilities). Convert closing stock price data to 200-day moving averages (the most recent 200 days of prices updated daily) so that long-term price trends become apparent. Use the transformed data to examine where the current value of the company stock price is compared to historical norms.

Industry Analysis

Competing stocks in the same industry face similar challenges. Choosing the best management to deploy company cash and assets can be measured by employing the same procedure described above and then ranking companies in the industry. The ultimate goal of basic stock research is to lead the investor to the strongest stocks in the strongest industries. It is from this point that the investor buys a diverse portfolio, allocating monies into each industry or sector (a similar group of industries) with above-average growth characteristics.

Market Analysis

Broadly speaking, stocks tend to move in the same direction at the same time. This is called a trend. Investor expectation is that good stocks rise more in bullish times and fall less in bearish times. Investors generally accept that if the 200-day moving average of the major stock indexes such as the S&P 500 and the NASDAQ average are rising then it is generally a bullish trend. Some investors, attempting to invest in long-term macroeconomic and population trends, ignore bear markets and hold stocks for years or decades. However, the longest periods of gains with the least amount of volatility (price fluctuation) come during bullish trends.

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