Primarily, there are two broadly categorized ways to study Stock market and take investment decisions. One is to study the market through charts known as Technical Analysis and the other way is to study the financial statements of a company while taking investment decisions formally known as “Fundamental Analysis”.
While taking decisions for short term trading technical charts could be of great help. Intra-Day trading or buying securities to take advantage of certain economic or company specific decisions sounds very lucrative but it involves great amount of risk also. That is where Technical Analysis could be of help to optimize the funding strategy and take decisions.
More or less Technical analysis helps to identify the equilibrium price of securities depending upon the supply and demand within market. In other words, technical analysis attempts to analyze the market sentiments behind the price of a security at any given time.
The majority of investors who are looking for opportunities to make long term investments rely on fundamental analysis. While investing in a security for long term, we generally have bullish sentiments regarding the growth prospects of the security. In fundamental analysis, we study the financial statements to evaluate the intrinsic value of the security along with general macro-economic environment. We study tangible assets like land, equipment, buildings along with intangible assets like trademarks, patents, brand or intellectual property.
So Fundamental Analysis is study of:
- Earnings of the Company
- Market Interest rate to decide upon the opportunity cost
- The Macro-Economic environment both global and local
- Competition in the market and company position
In conjunction with the above mentioned analysis, investors also take help of quantitative analysis to make sound investing decisions.
Evaluation of historical performance and predicting the future prospects are done through quantitative analysis which involves the study of financial ratios like EPS (Earning per share) or DCF (Discounted Cash Flow).
Generally investors try to take help of all the three above mentioned techniques while taking investment decisions.
The bottom line is: Fundamental analysis is most often used when determining the quality of long-term investments, while technical analysis is used more in the review of short-term investment decisions such as active trading of stocks. Investors use quantitative analysis to evaluate the financial stability of a company.
In this series we will covers topics of market analysis and build our expertise to study the stock market which would be of help while taking investment decisions.