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What is Security Analysis?

By Ryan Russell
Updated May 16, 2024
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Security analysis involves the research and evaluation of financial securities. Securities can refer to stocks, bonds, mutual funds, and more. Traders use security analysis to determine how to invest in a particular market, how much to invest, and when to invest. There are multiple schools of thought on how to properly preform security analysis.

Fundamental analysis is a common methodology used for performing security analysis. It involves studying a company’s balance sheet, financial reports, and market competitors. Fundamental analysis makes use of past and present information to make market predictions. Traders following a fundamental analysis approach the study price history of a particular investment security and attempt to forecast the future value.

Investors often use a fundamental analysis approach when evaluating the fundamentals of company's operation. They monitor reported quarterly earnings of a company as well as their asset holdings to form an opinion on the value of their stock. The investors using this approach know the names of executive management at the company and their track records, including successes and failures at previous companies. They are also able to determine the ability of the company to obtain credit, a key component of business success.

Technical analysis is another popular approach to security analysis. Investors adhering to a technical analysis methodology often take into consideration the psychology of other investors when making decisions about a securities market. What the larger portion of investors is thinking about a particular company is very important in evaluating future price, no matter if what they are thinking is based in truth or hearsay.

Practitioners of technical analysis are also known to use charts and numerical indicators relating to price change. They take a look at any trends relating to a company’s cash flow, profit margin, and price-to-earnings ratio. Technical analysts typically trade according to strict and definite rules. When several financial indicators relating to a company are within a predetermined range, they will buy the stock. This analysis differs from fundamental analysis in the emphasis it puts on market indicators over the performance of a individual company.

Investors who mix both approaches to security analysis are often referred to as quantitative analysts. All major schools of thought on security analysis have investors who have maintained a long-term record of success. At its core, security analysis involves in-depth research on numerous indicators, some much more important than others. Brokerage firms and investment banks count on security analysts to deliver long-term success to their clients.

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