Stock evaluation

There are numerous ways to evaluate stocks. Later in the future, we will cover several financial models to calculate intrinsic value of stock, which require you to read and analyze financial statements. But for now, let us examine basics to get the idea. In a broad perspective, there are two approaches to evaluate stock. One is called fundamental analysis and the other is technical. The difference between the two is not as obvious as there will be some overlaps and one thing performed in fundamental analysis can also be performed in technical. When it comes to investment, it can be classified into either "value" or "growth" investing. This is the most basic division between investors. One of the most well known investor, Benjamin Graham, is considered to be the father of value investing. On the other hand, there are plenty of great investors who made fortunes through growth investing, such as William O'Neil and Gary Pilgrim.
So what's the difference between the two? Growth investor looks for a company that is rapidly expanding in sales and earnings. Most likely, such companies are young and has a potential to become a "major stream" of industry in which the company operates. Such potential or growth may come from a new high-tech product, patent, oversea expansion, or even excellent management. Major components of growth investing are earning and stock price. On the contrary, dividend is not important because most growing companies will waive dividend and use the retained earning to expand its business. For growth investors, intrinsic value of stock is not important. This means you, as a growth investor, do not see the importance of stock price in relation to earning or book value. What is more important is earning growth and stock price momentum. In this case, buy low sell high is not your objective but rather it will be buy high and sell higher.
Value investing, on the other hand, look for stocks that are undervalued. In other words, you are looking for cheap/inexpensive stock. Note stock being cheap is not good enough. Even if a share of stock is trading at $1, it would be worthless if the company is on the verge of breaking-down. What I mean by cheap is undervalued stock in comparison with its market value. Value investing compares stock price (market value) to different measures of business such as earnings, sales, assets and cash flow (intrinsic value). Most of times, value investing require investor to carefully examine financial statements and compute intrinsic value of a company. Then one can determine whether the stock is under or overvalued. In both cases, investor looks for companies with bright prospect.
As mentioned, there are two approaches to evaluate stock. One is fundamental and the other is technical. In the fundamental approach, investor examines company information and evaluate its future success. Here, you will have to pay attention to financial statement including income statement, balance sheet, cash flow and other company released documents such as management note, company related news, etc. In contrary, technical analysis examines the past movement of stock price to predict its future behavior. Here you will analyze how the stock price moved in different market condition (bull/bear) and predict the stock's future movement based on current and projected market condition. It will require lots of charts and graphs to figure out pattern of stock price movement. The catch is that technical analysis focus on market demand and supply rather than intrinsic value of stock.