how to do equity analysis or valuation? To find the future pricing of a particular stock?

Question

I would like to know about the Methods of analysis(technical and Fundamental)

Answer 1

Technical analysts analyzes the historical graphical pattern of stock prices. They also look at the graph line drawn by stock moving averages over different periods. They are really interested if the current price line breaks through up or down the moving average line. From this, they derive a stock outlook for the future price of the stock.

Fundamental analysis is concerned with the historical financial performance of the company. A security analyst analyzing historical data will in turn make a projection of the future performance of this company (revenues, earnings, and growth rates). The security analyst will ultimately focus on 3 inputs to derive the value of a stock. These are earnings per share (EPS), a discount rate and a growth rate. The discount rate is equal to the risk free rate of return (10 Yr Treasury) + Equity Risk Premium. The discount rate is also called the required rate of return(RRR). So, using fundamental analysis the valuation of a stock is derived following this formula: EPS/(RRR - Growth rate). Let's take an example: a company has earnings per share of $10 and is associated with a RRR or discount rate of 13% and a growth rate of 6%. The valuation of this common stock will be equal to $10/(13% - 6%) = $143. And, if the market value of the stock does trade at this value investors would say the stock has a Price Earnings ratio or P/E ratio of 14. This is because $143/$10 = 14. And, that is just about where the market trades today.

Security analysts conducting fundamental analysis are very focused on valuation metrics such as the mentioned P/E ratio above.

I have shared with you most of what you need to know about stock valuation through either technical analysis or fundamental analysis. The reason is that either of them don't work. Analysts recommendations using either method are typically much worst than an investor simply buying an index fund and holding on to it.

I recommend an excellent book addressing this subject in detail: Burton G. Malkiel's "A Random Walk Down Wall Street." In chapter 6, he covers the flaws of technical analysis. In chapter 7, he does the same for fundamental analysis.

If you need any clarification, contact me through "Answer" and I'll modity my response accordingly.

Answer 2

Most technical analysis is crap.

As for fundamental analysis -- have you thought about taking some classes? I'd suggest taking the introductory finance class, a class in corporate finance, some accounting classes and then a class in securities analysis.

If you don't want to do that -- buy a good book on Securities Analysis. INVESTMENT VALUATION by Damodaran is a good place to start.

Answer 3

I believe that nobody can really tell you the method to determine the price of a stock in the future. However. I can propose something. you can read annual reports and try to track trends in changing the equity, you can calculate ratio from year to year such as debt to equity or return on equity. You can also look at Price/Earnings ratio for the whole industry, competitors and state of the economy as a whole. I hope I was a bit of help.