A stock exchange is a financial market to trade various financial products. The best known are stocks and bonds (traditional financial assets). Other generations of financial derivatives have emerged: derivatives products such as forwards, futures, swaps, options and warrants.
To choose its action, the investor must inquire first on the share value and thus the issuer, but must also take into account the macroeconomic informations. Then in order to refine his choice and have more precision, it may be based on the analysis (fundamental and technical) and equity ratios.
THE INFORMATION AVAILABLE
We must distinguish the information of the General macroeconomic and stock market information on issuers and their values. In theory, the evolution of the share price of a value depends on the intrinsic quality of the company but other parameters are involved. The macroeconomic situation also plays a role. Macroeconomics is the study of economic system's functionning. Economic growth, inflation, exchange rate and interest rates are representative elements of macroeconomics and be taken into account for the study of the stock market environment.
Economic growth is measured by the GDP growth rate. GDP measures all goods and services produced or offered on a national territory.
Inflation is characterized by widespread and sustained rise in prices led to a decrease in the purchasing power of economic agents and a deterioration in the value of the currency. It is measured by the CPI (consumer price index). Higher prices usually causes a rise in share price.
The exchange rate is the value of a foreign currency expressed in value. Its variation is explained by the evolution of the balance of payments. A Bdp deficit usually causes a decline in the value of the national currency and vice versa. The balance of payments covers all transactions between the country and outside.
Interest rates are the important macroeconomic variable for an investor. If we take the case of a monetary policy of interest rates, these will impact economic growth.
In addition to macroeconomic news, we must study the information on issuers such as the annual report is public and available on the internet. The annual report of a company that all the elements of a financial year n with a reminder of the year n-1 for the analysis of changes in positions.
The annual financial report is a very important source of information as it retraces the past year and present the financial statements (balance sheet and income statement).
THE FUNDAMENTAL AND TECHNICAL ANALYSIS
Fundamental analysis is based on financial analysis of a listed company, and more specifically on the analysis of its balance sheet and its annexes and its income statement. With these accounting documents, analysts measure the assets and financial profitability of a company and calculate financial ratios for assessing the capacity for investment and debt repayment.
There are other analyzes based on graphics. This is what is called technical analysis that studies the market price curves. Its premise the recurrence of the behavior of economic agents (Investors).
And finally the market analysis is based on stock market ratios, the most used is the PER (price earnings ratio).
The EPS (Earnings per share) which is equal to net income divided by the number of shares used to calculate the future performance of the action.
The PER meanwhile is the ratio between the share price and the value of EPS. The higher it is, the more value is expensive. The PER is worth compared to the average PER of a scholarship, but especially at PER of other values in the same sector.
Other ratios exist to get an idea of the value of a share.
All elements listed above are to be considered for a wise choice on a share of a business.