While the fundamental analysis f stock look at various factors like business, growth, competition, management effectiveness etc, the quantitative analysis discount all these factors since all of these are subjective terms. People will have different definition of conclusion about the management of a particular business and it all depends on how they see it or rather how management presents itself to them.

For quantitative analysis, the number crunching is done through advanced computers now days. These people who do this are also called as quants. These quants will do analysis based on complex formula and will decide on sell versus buy option purely based on these equations and numbers. Some of the major considerations while doing quantitative analysis of stock are:

Company size – First thing which the investors look at is the size of the company. This is usually done in term of capitalization or ‘cap’ in short. Broadly, the companies are divided into various caps depending upon their market. These are micro cap, small cap, mid cap and large cap. Smaller the cap, riskier is the company since it can go bankrupt very easily. But smaller companies have the chances to grow radically as well. Broadly, the guidelines of distinguishing these caps are:

Large cap — $10 billion or more.

Mid cap — $2 billion to $10 billion.

Small cap — $250 million to $2 billion.

Micro cap — $250 million or less.

Criteria based or screen based investing – Some analysts use a filter or criteria to select the company which they want to trade on. These criteria are based on quantitative factors. Again this is done using computers since the selection is done pretty fast.

Momentum of the company can also be used as a deciding factor. Some companies are just doing well for a few quarters in a row which make people believe that company is in good shape. These companies usually outperform other companies in short run and everyone would like to buy stock of this company.

Another interesting topic in quantitative analysis is something called as CANSLIM. CANSLIM is a system pioneered by William J. O’Neil that is a hybrid of quantitative analysis and technical analysis. CANSLIM has an interesting acronym. C and A stand for current and annual earnings, N stands for new (new product or new market), S stands for small cap and large volumes, I for institutional ownership and M for market momentum. All these factors are used to decide buy or sell of a company.

Related posts:

1. Stock Analysis for beginners – Stock Analysis Techniques
2. Fundamental Analysis of Stocks
3. Analysis using stock screeners

It is a proven fact that investing in stocks has given the best returns in the long term. The return of investment is much more than those in certificate of deposits or even mutual funds. But for that, it is important that you understand how to do stock analysis and know which stocks are a good buy and which are not. Let us take a look at methods which are used to analyze the stock.

There are basically 3 ways in which stock analysis is done:

• Fundamental analysis of stocks
• Technical Analysis of stocks
• Quantitative analysis of stocks

Fundamental Analysis of stock

In fundamental analysis of stocks, the investors study the stock as a business. When you buy a stock of a company, you are buying a part of that business. Therefore they try to find out the value of that business and then see what the worth of that stock is. This is usually done by assessing the financial per value share of the business. Those who believe in fundamental analysis of stocks like to think that this is the only good way to analyze the stock.

While doing this type of analysis, a few things at which analysts look are value, growth, income, GARP (Growth at reasonable price) and quality. We will cover the fundamental analysis of stock in detail under another topic. Warren Buffet is one of the most famous practitioners of this theory.

Technical Analysis of stock

A lot of investors just look at all the financial details available in the market which are disclosed by the company and then try to figure out whether it is a good buy or not. Since this is public information and available to everyone, you don’t find any edge over other investors. Therefore, some investors try to figure out alternate methods of analysis the stock. One such way is to use tools which tell them what the investors might think about the stock at a particular time. Those who try to do this analysis based on psychological information are called technical analysts of stocks. They use charts like point and figure charts, logarithmic charts, and Japanese candlesticks to do this kind of analysis. Again, we will cover technical analysis of stocks in greater detail under another post.

Quantitative Analysis of stocks

As the name suggests, this type of analysis is purely quantitative meaning it is based purely on numbers. Unlike fundamental analysis, this theory doesn’t believe on things like business, management’s expertise, competition, market potential etc. This theory believes that these parameters are subjective and can be inferred differently by different people. In quantitative analysis, only numbers talk. Company size is considered while analysis the stock. While doing the analysis, investors might adopt screen based investing. In this method, they apply some filters on the numbers. Only if a company passes all filters, and then they do in depth analysis about that stock, else reject it. Another system called CANSLIM is also used which is a hybrid of fundamental and technical analysis.

Above, we have tried to cover the stock analysis techniques which are generally being used in market today. For beginners, it is important to understand the basics of stock analysis. Then, depending upon the philosophy they want to adopt, they can go and study any of these techniques in greater detail.

Related posts:

1. Quantitative analysis of stocks
2. Fundamental Analysis of Stocks
3. Technical analysis of stocks