Contents
5 minutes read
12 March 2025
Investing in US stocks can be exciting and rewarding, but making the right decisions requires proper analysis. Whether you are a beginner or an experienced investor, understanding how to evaluate stocks is essential to maximising returns and minimizing risks. The two primary methods used for stock analysis are fundamental and technical analysis.
Fundamental analysis evaluates a company’s financial health, industry position, and economic factors that impact its growth. Technical analysis, on the other hand, studies stock price movements, trends, and trading volumes to predict future price action. By learning both approaches, investors can develop a well-rounded strategy for making informed investment decisions.
This guide explores these two types of analysis, key indicators, and tools you can use to analyse US stocks effectively.
Types of stock market analysis
When analyzing stocks, investors generally rely on two key approaches—fundamental analysis and technical analysis.
Fundamental analysis involves studying a company’s financial statements, valuation metrics, industry position, and macroeconomic factors. It helps investors determine a stock’s intrinsic value and decide whether it is overvalued or undervalued. This method is useful for long-term investors who focus on a company’s overall growth potential.
Technical analysis, on the other hand, examines historical price movements, trading volume, and market trends. Investors and traders use various charting techniques and technical indicators to predict short-term price movements. Unlike fundamental analysis, technical analysis does not consider a company's financial health but instead focuses on patterns in stock price behaviour.
Many investors use a combination of both methods to get a comprehensive understanding of a stock’s potential.
Fundamental analysis
Fundamental analysis helps investors assess a company’s value based on financial performance and external market factors. Investors can determine whether a stock is worth buying by examining financial statements, valuation ratios, economic indicators, and industry positioning.
Financial statement analysis
A company’s financial statements provide a clear picture of its profitability, assets, liabilities, and cash flow. The three key financial statements investors should analyze are:
- The income statement shows the company’s revenue, expenses, and net profit over a specific period. It helps determine how efficiently a company generates profit.
- The balance sheet presents the company’s total assets, liabilities, and shareholder equity. It reflects the financial stability and overall strength of the business.
- The cash flow statement tracks the cash coming in and out of a company. It helps investors assess whether a company has enough liquidity to sustain operations.
By reviewing these financial reports, investors can make informed decisions about a stock’s potential for long-term growth.
Valuation ratios
Valuation ratios help investors determine whether a stock is overpriced, underpriced, or fairly valued. Some of the most commonly used ratios include:
- Price-to-earnings (P/E) ratio, which compares the stock price to its earnings per share. A high P/E ratio may indicate that a stock is overvalued, while a low P/E suggests it may be undervalued.
- Price-to-book (P/B) ratio, which measures the stock price relative to the company’s book value. A lower P/B ratio may signal a stock that is trading below its actual worth.
- Dividend yield, which shows how much a company pays in dividends relative to its stock price. This is useful for income-focused investors looking for consistent returns.
Economic indicators
Macroeconomic factors also play a crucial role in stock performance. Changes in interest rates, inflation, and GDP growth can affect a company’s profitability and market sentiment. For example, rising interest rates can make borrowing more expensive, reducing corporate earnings. Similarly, high inflation can impact consumer spending and business profitability.
Industry and competitive positioning
A company’s position within its industry can significantly influence its stock performance. Investors should consider factors such as market share, competitive advantages, and industry growth trends. Companies with strong leadership, innovative products, and a solid customer base often have better long-term potential compared to their competitors.
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Technical analysis
While fundamental analysis focuses on a company’s financials, technical analysis studies stock price trends and patterns. This method is particularly useful for short-term traders looking to capitalize on price movements.
Stock charts
Stock charts help investors visualize price movements and identify trends. The two most commonly used charts are:
- Line charts, which show an overall trend of stock prices over time.
- Candlestick charts, which provide detailed insights into daily price action, including the opening, closing, highest, and lowest prices.
Moving averages
Moving averages help smooth out price fluctuations and identify trends over time. The simple moving average (SMA) calculates the average price over a set period, while the exponential moving average (EMA) gives more weight to recent price changes, making it more responsive to current market conditions.
Support and resistance levels
Support and resistance levels indicate points where a stock’s price tends to stop moving in a certain direction. Support levels act as a floor where buying interest is strong, preventing further price drops. Resistance levels act as a ceiling where selling pressure increases, preventing the stock from rising further. Traders use these levels to determine entry and exit points for their trades.
Volume analysis
Volume analysis examines the number of shares traded within a given period. High trading volume often confirms strong market interest and can indicate whether a price trend is likely to continue.
Tools and resources for US stock analysis
To effectively analyze US stocks, investors can use various online tools and platforms.
Stock screeners like Finviz and Yahoo Finance allow investors to filter stocks based on financial ratios, technical indicators, and industry trends. These tools help narrow down stock choices based on specific investment criteria.
Investing platforms like Vested Finance, Interactive Brokers, and TD Ameritrade offer advanced charting tools, research reports, and market insights to help investors make informed decisions.
Getting started with stock analysis
If you are new to stock analysis, start by learning the basics of financial statements, valuation ratios, and market trends. Use stock screeners to identify potential stocks that meet your investment criteria. Study price charts and indicators to understand price movements. Stay updated on financial news, company earnings reports, and macroeconomic events that may impact stock prices.
Investing takes time and practice, so start small and build your confidence as you gain experience in analyzing stocks.
Analyzing US stocks requires a combination of fundamental and technical analysis to make well-informed investment decisions. By understanding financial statements, valuation ratios, and economic indicators, investors can assess a company's true value. At the same time, studying stock charts, moving averages, and support and resistance levels can help predict short-term price movements.
With the right tools and strategies, investors can confidently analyze US stocks and make smart investment choices. If you're ready to get started, explore platforms like Vested Finance and apply the insights from this guide to build a strong investment portfolio.
