A comprehensive guide to stock analysis: Methods & insights

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.

• 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.

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:

• 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.

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:

• 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 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:

• 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 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:

• 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.

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!

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.