Fundamental Analysis V/s Technical Analysis
Fundamental Analysis [FA] and Their Importance
Fundamental Analysis involves evaluating factors, both company-specific and external, influencing stock value. It entails comprehending the impact of these factors on stock valuation, analyzing the business environment, and interpreting financial statements.
Fundamental analysis involves examining securities that are potentially mispriced by the market, analyzing factors from a macro to micro perspective. Analysts consider macroeconomic elements like the economy, inflation, fiscal policy, and employment, as well as microeconomic factors such as supply and demand, competition, product features, entry barriers, taxes, regulations, and management effectiveness.
Analysts typically study, in order
A] The overall state of the economy
B] The strength of the specific industry
C] The financial performance of the company issuing the stock
Fundamental analysts conduct extensive research and studies before investing in a security, aiming to determine its fair market value. This analysis helps predict future price movements and assess whether a stock is undervalued or overvalued. If the fair market value surpasses the market price, the stock is considered undervalued, leading to a buy recommendation.
Assumptions In fundamental analysis
1] The current stock price may not fully capture the company’s value when evaluated against publicly available financial data.
2] The value derived from the company’s fundamental data is likely to be a more accurate representation of the stock’s true worth.
Fundamental analysis employs various data, including a company’s financials, to assess its intrinsic value and growth potential.
Fundamental analysis relies on Economic, Industry, and Company analyses, evaluating financial data like Earnings per Share, P/E ratio, beta, growth prospects, return on equity, and profit margins. Examining company ratios provides insights into its performance relative to peers.
Price/Earnings-to-Growth (PEG) Ratio = (Price/Earnings) \ Annual EPS Growth
The P/E ratio is derived by dividing the market value price per share by the company’s earnings per share. It aids investors in assessing the stock’s market value in relation to its earnings. Essentially, the P/E reflects the market’s current willingness to pay for a stock based on past or anticipated earnings. A high P/E may suggest overvaluation, indicating a high stock price relative to earnings. Conversely, a low P/E may signal undervaluation, implying a lower stock price in relation to earnings.
Fundamental factors can be grouped into two categories: quantitative and qualitative.
Quantitative: information that can be shown using numbers, figures, ratios, or formulas
Qualitative: rather than a quantity of something, it is its quality, standard, or nature
Basic concepts of Fundamental Analysis
Ratio Analysis
Equity Valuation
Financial Statement Analysis
Decoding an Annual Report
Technical Analysis and their Importance
Technical Analysis (TA) involves studying market action primarily through past volume history, statistical data analysis, and chart pattern recognition, often utilizing graphical representations like line charts or candlestick charts. Charts serve as graphical displays of data. Technical analysis tools help examine how supply and demand dynamics impact price, volume, and implied volatility changes in a security. It is commonly employed to generate short-term trading signals using various charting tools. TA revolves around the fundamental principle of trends, recognizing that markets exhibit trends. Traders aim to buy a security early in an uptrend at a lower price, ride the trend, and sell when the trend concludes at a higher price. The behavior of a trend in annual data remains consistent across various time frames, illustrating a fractal nature.
Confirmation is essential for identifying the direction of the primary trend. If the trend fails, a reversal is anticipated. In Dow Theory, a comparison is made between industrial and railroad sectors.
Volume is a crucial factor in technical analysis, confirming trends and chart patterns. A price movement accompanied by high volume is considered more significant than a similar move with low volume. Volume should align with the trend, increasing during upward movements and decreasing during downward movements. Any deviation from this relationship is often a signal of weakness in the trend.
Types of Trend
Primary Trend : Measured in months or years,
Secondary Trend : Measured in weeks or months,
Short-Term Trend : Measured in days,
Intraday Trend : Measured in minutes to hours.
Technical analysis assumes
a] Price is determined by the interaction of supply and demand.
b] Price (average) discount everything.
c] History, in principle, will repeat itself.
Technical analysis disregards the consideration of all publicly available information in a security’s price and instead concentrates on statistically analyzing price movements. It aims to interpret market sentiment through the identification of patterns and trends.
Basic concept of Technical Analysis
Theory On Technical Analysis : Dow Theory, Market Trend Analysis, Breakout Theory, GAP theory.
Demand and Supply Zone – Boring and Explosive Candles.
Types Of Chart : Japanes Candle Stick Chart, Line Chart and Bar Chart.
Chart Patterns : Simple Chart Patterns, Complex Chart Patterns and Advanced Analysis of Western Chart Patterns.
Knowledge On Chart Indicators : (1) Trend (2) Momentum (3) Volume (4) Volatility and Others.
Importance of Levels, OHLC Study, 52 High vs 52 Low Theory.
Order Types using Target, Stoploss and Exit Rules.
Contrarian Thinking ( Short Sell).
Practical use of trading softwares.