How to study stocks is an age old question in
the market. Some people advocate in favor of fundamental analysis, while others
support the use of technical analysis. It’s more like how guys always think
their car is better than their friends’- it’s just that you have driven your
car for a long time now and you have learned more about it. People who have
used any of the above methods long enough, know how to reap maximum benefits
from it.
Studying annual and quarterly reports of companies, is considered the
best way to analyze a stock by many people. Well, my experience has shown that
being aware of the stock’s price range, is also key.Companies with strong
financials have found to be stagnant in the market time and again. At the same
time, we see them falling in price, whenever the market goes down. Knowing the
direction of prices for potentially good or even great companies seems to help.
This is in relation to the perceptions of market participants. Highly
enthusiastic investors in rising markets, lose their enthusiasm to fear during
falling markets. Even those who call themselves long term investors, act like
amateur traders when the indices fall by 20%. The average investor is not
Warren Buffett, so noticing trends in prices can facilitate better decisions.
Many investors have been found to buy up shares of companies that are
traded at their lowest in a year. The Gujarati investors follow a totally
opposite dynamic- they buy stocks that have crossed their highest price in a
year. The latter believe that a consistently falling stock price implies that
the investors have lost their faith in the company. Buying such stocks will
only let your money stagnate, with no significant rise in prices.
Although the discussion and taking sides continue, I have always found
that adopting a Techno-Fundamental approach, where we take parts of both
fundamental and technical analyses, to be convenient. Companies that
consistently grow in net worth and assets with limited liabilities and a growing
market share, are the ones that can be called good companies. We can notice
quality companies from their track record for the last 5 to 10 years. At the
same time, also look at the direction of the stock price. This is the easiest
method for stock picking. You can see the opening price, highest price, lowest
price and the closing price of stocks- the most important one being the closing
price.
The closing price shows us the current direction of the stock price.
Only stocks that have the investors’ faith will close at a higher price.
Compare closing price with that of the previous day. Closing prices at the end
of weeks and months can be compared thus. And this is how we know whether the
market sentiments are in favour or not.
As you might have noticed, all the methods discussed above are very
simple. Now, if we look at these techno fundamental parameters before
investing, it can guide you towards wealth creation.