Stock Analysis:

Basic Analysis:

A relatively important tool for investment analysis. It aims to identify whether a company’s fair value is too high or too low. There are two ways to judge a company’s fair value. One is to judge by its estimated profit/dividend pay out ratio, while the other is to judge by its net asset value.

Basic analysis suggests the stock price would reflect its actual value. Assuming a stock is priced at $2 and its net asset value is $5 per share. The stock is said to be traded in discount. Basic Analysis believes the stock price will eventually reflect its actual value, that is, the price difference between its market price and its net asset value per share will be narrowed.

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Stock’s Intrinsic Value:

Why would $1000 cost less than it does one year later? It’s because we have to consider the time value of money. We have to discount the total income generated from a stock, including dividends and the amount of shares sold, in today’s value.

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The formula:

PV= Present Value
D= Annual dividends obtained
P1= Stock price at which the shares are sold one year later
R= Market interest rate

Example:
A stock’s dividend is $0.8, and its price is estimated to reach $20 one year later. Market interest rate is 7%. The stock’s intrinsic value is:

PV= $19.63
If a stock’s PV is higher than its current price, that may indicate it’s time to buy.

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Financial Analysis:

Financial analysis can help us spot companies with huge investment potential.? Financial analysis covers a company’s operation status, profitability, annual result, etc.
The items found on the balance sheet and the P/L account show lots of financial information about a company, such as its asset value, gross profit, net profit, etc. But we cannot effectively conclude its performance based on them. For example, two companies having the same amount of profit does not mean they must carry the same investment value, due to differences in the scale of the two companies. 
The followings are the common financial ratios.

Current Ratio
Return on Asset
Debt-to-equity ratio
Dividend pay out ratio
Price to earnings ratio
Net asset value
  
The information related to the above items can all be found in the balance sheet and P/L account (excluding dividends and stock price). Investors only have to access the company’s website and calculate the financial ratios themselves.

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Dow Theory:

An analysis explores the relationship Dow Jones Transports and Dow Jones Industrials. It suggests when one of these averages rises to an intermediate high, the other is expected to follow suits. If this is not the case, a divergence exists and the market is liable to reverse course.
The theory also suggests there are three movements in the market.

1.The "main movement", which can be bearish or bullish, may last from less than a year to several years.
2. The "medium swing", or the secondary reaction, may last from three weeks to a few months and generally retreats from 33% to 66% of the primary price change since the previous medium swing.
3. The "short swing" or minor movement, may last less than three weeks.

 The Japanese started using the candle stick to trade rice dates back to the 17th Century. It was then spread to the western stock markets. A candle stock comprises the upper shadow, real body and lower shadow. The filled or hollow portion of the candle stick is the real body, while the thin and long lines below and above the body are the shadows, or wicks and tails.
The daily high is on the top of the upper shadow while the daily low is at the bottom of the lower shadow. A hollow candlestick is drawn with the bottom of the body showing the opening price and the top of the body representing the closing price if the stock closes at a level higher than its opening price. Meanwhile, a filled candle is drawn with the top of the body showing the opening price and the bottom of the body representing the closing price if a stock closes at a level lower than its opening price.

Bollinger Bands are a technical analysis invented by John Bollinger which comprises of three bands. The middle band is the 20-day moving average, the upper band is twice above the standard deviation of the 20-day average closing price, while the lower band is twice below the standard deviation of the average closing price in the same period.

The analysis suggests stock price would hover within the upper and lower bands, which indicate the levels of support and resistance.
However, we cannot merely rely on the Bollinger Bands as signals of buy and sell.? It is best used as a complement with other technical analysis indicators.

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Momentum Indicator:

Momentum Indicator seeks to predict stock price direction in the future based on recent transaction volume and its price movement.
Once an acceleration in a stock price is seen, a momentum trader would take a long or short position in the hope that the momentum will persist ( either an upward or downward direction). Usually a 10-day momentum line is constructed for short term prediction whilst a 18-day momentum line is used for long term prediction.

A 10-day momentum line is drawn by linking the plots of daily MOM. Generally speaking, if prices are increasing and the momentum line is above zero and rising, an accelerating upward trend would be in place. Conversely, if the momentum line begins to flatten out, it may suggest the upward momentum has come to the end.

A vertical line is drawn by linking the highest and lowest prices a stock is traded during the day.? The closing price is shown on the right hand side of the bar while the opening price is displayed on the left hand side.
However, bar chart alone cannot signify whether it’s right time to buy. Bar chat is best used as a complement with other technical analysis indicators.

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Moving Average:

An indicator illustrates the average value of a stock over a set period of time. It seeks to show a security’s momentum and the possible support and resistance areas.
Generally speaking, an upward momentum is said to be found if the a short term average (e.g.10-day) crosses above the long term average (e.g.50-day), while a downward momentum is said to exist if the short term average crosses below the long term average.

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Relative Strength Index:

The index seeks to indicate whether a stock is overbought or oversold by comparing with its magnitude of recent gains to recent losses.
The equation is

Where
RS= Average number of days’ up close/Average number of days’ down close

A stock is considered being overbought when its reaches the 70 level or higher, while a security is considered to be oversold if it dips below the 30 level. Investors should consider selling the shares when the stock is overbought. Conversely, investors could consider buying a stock when it is oversold. Again, investors should use it together with other technical analysis indicators.

The Gap Theory can be classified as upward gap and downward gap.
An Upward gap exists when a stock’s daily low is above its previous day’s high, which indicates strong market demand for the stock. Positive news or a change in investor sentiment can often trigger higher demand.
A downward gap occurs when a stock’s daily high is below its previous day’s low, signaling a bearish sentiment for the stock.

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Contrary Opinion Theory:

The theory suggests price reversals following market sentiment extremes. Contrary to major viewpoints in the market, investors should buy when everyone is selling while they should sell when everyone is buying.
A study finds that only 5 % of the investors can make profit in the stock market, as the remaining 95% of the investors are all losers. To be one of the winners in the market, the theory advises investors not to follow the mainstream.

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