What is share analysis?

There are many ways to analyse companies and share prices. Here we introduce the principals of fundamental and technical analysis.

What is fundamental analysis?

This is the analysis of a company’s strengths and weaknesses, its business credentials, financial performance and factors that affect its earnings, dividends and future growth prospects.

Fundamental analysis can help you determine whether shares are currently trading at an attractive price, relative to a company’s fundamental value.

This would also include an assessment of a company’s competitors and the market sector that it operates in.

Fundamental analysis can be broken into two distinct areas:

• Story – what the company does, how it makes money, what the future might hold
• Numbers – the company’s annual report, cash flow, debt, earnings and profit

When it comes to the numbers, a good place to start is with a company’s annual or half year reports.

These include a wealth of financial detail but also key insights into a company’s strategy and growth plans.

It’s important to view the different components, such as assets, debt, cash flow, earnings and profit, holistically to get an idea of the direction a company is going in.

In the coming modules we will pick out some of the key methods of conducting fundamental analysis to help you make better informed investment decisions.

These include earnings per share, price to earnings ratios, dividend yields, earnings and profit.

What is technical analysis?

Often referred to as charting, technical analysis involves studying past movements in a company’s share price to help predict how it might move in the future.

While some investors might swear by this technique, others will say there’s simply no way of knowing how prices will move in the future.

Nonetheless, the idea is to use share price charts to identify trends. For example, one company’s shares might have traded no lower than $7 and no higher than $15 over the past five years, regularly fluctuating between the two ends of the scale.

If this was the case, an investor might look to buy the shares when they fall close to $7 and sell when they are approaching the $15 mark.

Some investors like to use fundamental analysis to identify companies to invest in and technical analysis to work out when to buy and sell.