Fundamental Analysis vs Technical Analysis
There are varied techniques and methodologies to analyze Stock market and the philosophy it preaches. There are two basic methodologies that enable the assessment of the market and decisions that influence investments.Fundamental analysis:
Fundamental analysis is the evaluation of a company or security and the estimation of its fundamental value on the basis of qualitative, quantitative and economic factors. Overall factors encompassing the financial scenario are all taken into consideration. It is all about viewing and reckoning the big picture that includes macro- economic factors and the company specific factors also. Trade strategies are formulated bearing in mind supply- demand relation, trade balance, foreign investment etc. This approach makes it possible for you to attain stability even in a volatile situation.This analysis involves assessing the financial situation of the company with the help of its balance sheets, growth patterns, future projects and cash flow statements and the situation of the industry at that point of time.
Technical analysis:
Technical analysis takes into account the previous records of the company with the help of its statistical data. Charts and other data are considered to be the tools to predict the future potency of the company. Varied types of charts including bar charts, candlestick charts, price charts are all gauged on. Understanding the past trends and patterns of the company becomes a requisite here. The movement of the scrip determines key decisions regarding the entry and the exit of the market. In a nutshell, the past is considered to be the means to forecast the future. Technical analysis is generally capable of granting information regarding momentum, moving averages and trend formation.
Both the analysis has its own pros and cons making it difficult to assert that one is superior to the other. While Fundamental analysis is considered to be more common and extensively used technique, Trade analysis has been considered to be more reliable and time – tested by another section of the population. Fundamental analysis versus Trade analysis is going to be a never ending debate with supporters of each group fighting with the other. The objectives of both the analysis is the same and they surely do not contradict each other’s results is what must be understood.
The efficacy and the application of these two methodologies may vary depending on time horizon and the trader’s interest and purpose. Trade analysis is considered to be a skilled technique in the short term. On the other hand, one can resort to financial analysis in the long run. Short term comprises of Macro trading, day trading and swing trading while long term entails the holding period of more than a year.
Bearing in mind both the analyses will be recommended to ensure a sensible decision. Instead of cutting down on one analysis, one can play safe by practicing both the analysis. Comprehensive information can be gathered by considering both the analysis. Since both fundamental and technical analysis has its own applicability and appropriateness, it is advised one gets familiar with both.
Summary:
The two major analysis considered to assess the company‘s strength and value are fundamental analysis and technical analysis. Fundamental analysis is a wider approach of evaluation which takes into consideration varied indicators including the macro economic factors and the industry situation. Technical analysis is a method of forecasting the future of the security by viewing its past with the help of statistical data and charts. There has been an ongoing debate regarding which of these two analyses are more efficient than the other.
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Below is just a little information on this topic from my small unique book "The small stock trader":
The most significant non-company-specific factor affecting stock price is the market sentiment, while the most significant company-specific factor is the earning power of the company. Perhaps it would be safe to say that technical analysis is more related to psychology/emotions, while fundamental analysis is more related to reason – that is why it is said that fundamental analysis tells you what to trade and technical analysis tells you when to trade. Thus, many stock traders use technical analysis as a timing tool for their entry and exit points. Technical analysis is more suitable for short-term trading and works best with large caps, for stock prices of large caps are more correlated with the general market, while small caps are more affected by company-specific news and speculation…:
Fundamental analysis
Perhaps small stock traders should not waste a lot of time on fundamental analysis; avoid overanalyzing the financial position, market position, and management of the focus companies. It is difficult to make wise trading decisions based only on fundamental analysis (company-specific news accounts for only about 25 percent of stock price fluctuations). There are only a few important figures and ratios to look at, such as:
• EPS/Revenue
• Cash/EBIT(TA)
• Margins
• Debt
• Management
• Products
• Shareholders
perhaps also:
• ROE
• P/E
• Dividend yield
Furthermore, single ratios and figures do not tell much, so it is wise to use a few ratios and figures in combination. You should look at their trends and also compare them with the company’s main competitors and the industry average. Preferably, you want to see trend improvements in these above-mentioned figures and ratios, or at least some stability when the times are tough.
Technical analysis
Despite all the exotic names found in technical analysis, simply put, it is the study of supply and demand for the stock, in order to predict and follow the trend. Many stock traders claim stock price just represents the current supply and demand for that stock and moves to the greater side of the forces of supply and demand.
If you focus on a few simple small caps, perhaps you should just use the basic principles of technical analysis, such as:
• Price and volume
• Support and resistance
• Trends and moving averages
I have no doubt that there are different ways to make money in the stock market. Some may succeed purely on the basis of technical analysis, some purely due to fundamental analysis, and others from a combination of these two like most of the great stock traders have done (Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, William O’Neil, and Steven Cohen). It is just a matter of finding out what best fits your personality.
I hope the above little information from my small unique book was a little helpful!
Mika (author of "The small stock trader")
Please send a copy to review and post and an article in the blog..
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