How To Analyse Stocks Before Buying? Know Basics About Fundamental And Technical Analyses

Last Updated:July 26, 2025, 16:23 IST

To analyse stocks and make informed investment decisions, one needs to know market trends, investor sentiment and the financial health of the company.

Investing in equity shares of companies could be lucrative, but it requires more than just following market trends or choosing well-known names. To make the most out of the stock market investments, investors should research every stock they want to buy in advance. The two most popular approaches are technical analysis and fundamental analysis.

Even though each serves a different purpose, understanding both could help you create a prudent financial plan.

Fundamental Analysis: Understanding The Business

The core method focuses on examining the health of the finances of a company, the quality of management, the market situation and the ability to expand. The approach supposes that the intrinsic value of the stock is determined by the performance and fundamentals of the firm.

The key things to remember are:

Financial statements: Review the firm’s income statement, balance sheet and statement of cash flows. Look for revenue expansion, profit margins, debt levels and cash reserves.

Earnings and ratios: Financial statistics like earnings per share (EPS), price-to-earnings (P/E) ratio, return on equity (ROE) and debt-to-equity ratio give information regarding profitability and valuation.

Industry position: Discover how the company is positioned versus the competition. Good market positioning and a competitive edge are key to the value of the company.

Management and governance: Transparency of corporate governance and leadership quality also play significant roles in the long-term performance of a company. Any operational issues or leadership problems could be a red flag.

Macroeconomic factors: More general economic indicators such as interest rates, inflation and government policies affecting a particular sector can also affect a company’s performance.

Long-term investors who are willing to hold on to the stock for many years and understand a company’s value could rely on fundamental analysis to assess the potential growth.

Technical Analysis: Reading Price Movements

Technical analysis relies on the examination of stock price charts and volume. Instead of examining a company’s fundamentals, it considers market psychology, trends and momentum. Technical analysis is often used by analysts, market experts and frequent traders to minimise risks and devise strategies as per emerging trends.

The things to keep in mind are:

Trend lines: They are a useful tool for determining and validating a stock’s movement direction. They serve as support or resistance levels and help traders in identifying upward or downward trends.

Support and resistance: These show the levels where there is significant buying or selling pressure. Support means a price at which further decline is prevented due to potential increases in demand. Resistance stops upward momentum by indicating a level at which selling may increase.

Volume: This indicates how aggressively a stock is traded. The strength of a trend, whether upward or downward, is confirmed by high volume.

Technical analysis is of greater value for short-term to medium-term traders who want to time their entry and exit based on the movement of prices.

Using Both To Make The Right Decision

Most investors combine both approaches. For instance, you may select a company that is fundamentally sound and apply technical analysis to determine when to buy.

Knowledge of both methods does not promise higher gains always, but minimises risks. These analyses help in devising more effective investment strategies.

Business Desk

A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al…Read More

A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al… Read More

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