Before investing in any stock/ share, one needs to do some research about the same. Research of a stock can be done by either of the two ways : Fundamental Analysis or Technical Analysis.
Fundamental Analysis
Fundamental Analysis, as the name suggests, deals with the fundamentals of the company. Here, we understand the business of the company, various factors affecting the business of the company, earning potential of the company, etc. In other words, fundamental analysis is all about getting an understanding of a company, the health of its business and its future prospects.The fundamental information that is analyzed can include a company's financial reports, and non-financial information such as estimates of the growth of demand for products sold by the company, industry comparisons, and economy-wide changes, changes in government policies etc..
Fundamental analysis is a stock valuation method that uses financial and economic analysis to predict the movement of stock prices. The most common method of Fundamental Analysis is EIC Approach, i.e. Economic Industry and Company Analysis. Here in, first the economy where the company is functioning is analyzed, there after the industry and then the company specific analysis is done. This is the Top Down Approach. For example, If we study the Indian Economy, we understand that more than 70% of the population is still residing in the rural areas, where they still don’t have good transportation facility. However, with increase in the land prices, many people have sold their lands and are looking forward to buy a car. This gives a hint of benefit of Passenger vehicles industry. Then we can analyze the industrial factors, like number of car sellers, brand value of a specific company, etc.. Then after going for a specific company and analyzing the performance and other factors of the company to decide, whether to buy the stock of that company. Bottom up Approach, starting from analysis of Company and going up towards economy can also be done in some cases.
For doing fundamental analysis, one needs to update himself with various factors that affect the company’s business, industry or the economy. For example, the defaults by various companies are affecting the performance of various banking companies.
Technical Analysis
Technical Analysis is the study of the past performance of the price of the stocks, primarily through charts, in order to predict the future price of the stock. Technical analysis can help investors & traders to anticipate what is “likely” to happen to price over certain period of time. The beauty of this study is that it is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the force of demand and supply.
Rather than focusing on various factors about the stock, the focus of technical analysis is on the price and volume data of the stock. This is done through the use of Charts and indicators. The basic assumption followed in technical analysis is that the price of the stock has already factored in all the information that has an impact on the price of the stock. Technical analysts don't look at any of the qualitative data about a company (for example, its management team or the industry that it is in); instead, they believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables. Technical analysis assumes that market psychology influences trading in a way that lets them predict when a stock will rise or fall.
Some common myths about Technical Analysis
Technical Analysis is only for short term trades.
This is absolutely wrong. Technical analysis can be done for investments for a long term investments.
Technical Analysis cannot be used if fundamental analysis is done.
Again this does not hold true. Fundamental analysis tells you WHY to buy a stock, where as technical analysis tells you WHEN to but it. Hence, one can do both the analysis for making better decision on buying and selling of a stock.
Technical Analysis is quick and easy.
This statement does hold a little truth, but it is not so simple. Technical Analysis is simple if practiced properly for a reasonable period of time. Nothing but practice makes a better technical analyst.
Ready-made Technical Analysis software can help traders make easy money.
Ready-made software do help you with providing insights and supporting tools required for technical analysis, they don’t give you the final decision. It is the human who has to take the final decision using the software.
Winning rate in technical Analysis should be higher to earn more profit.
It is common perception that you need to make more number of profitable trades to earn more profits. 40% of the trades going right, will give you a good return on your investment.
Technical analysis is one of the oldest trading concepts and has become exponentially more advanced with the use of super fast computers. Many of the present-day advanced trading systems running on high-end computers at large trading firms are based on technical trends. Technical analysis can be a trader’s cornerstone strategy or one of many useful data points. Technical analysis and fundamental analysis are both powerful strategies that investors and traders can utilize to aid their trading decisions. Just like how you might be holding an iPhone while typing away on a PC, it is possible to utilize both technical analysis and fundamental analysis. One just needs to keep an open mind.
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