The fundamental analysis treats a stock investment as a way of having ownership in a company’s business. This approach allows an investor to benefit from the enormous wealth, which is generated by owning a successful business over a long time. On the other hand, Technical analysis tries to predict the next ‘up move’ in a stock’s price and is indifferent to the company’s business. Selling a good stock only after one ‘up move’ in its price is not a long-term winning decision.
Fundamental analysis needs study of EIC (Economy, Industry, and Company) either top-down or bottom-up approach. Technical analysis does not require it.
An investor should focus on investing in stocks of companies which are:
1. Growing at a respectable pace
2. Have sustained profitability
3. Generating free cash flows
4. Conservatively financed [very low debt to equity (D/E) ratio: preferably debt-free]
5. Run by competent & shareholder-friendly management.
Followings are trends and ratios that should be carefully noted in this step:
1. Earnings Per Share (EPS) – Increasing for last 5 years.
2. Sales Growth:– Increasing for last 5 years.
3. Return on Equity (ROE)– Should be greater than 15%.
4. Debt to Equity Ratio – Should be less than 1.
5. Price to Earnings Ratio (P/E) – Low compared to companies in the same industry.
6. Dividend – Increasing for the last 5 years.
Once you are confident that the company fulfills most of the criteria mentioned above, then study the Annual reports of the company. It is the single most important document that every investor should read. While analyzing companies for the first time investment, Investors should prefer reading annual reports going back as far as possible, preferably for the last 5 to 10 years or more. The process of shortlisting companies is necessary so that an investor can focus his/her limited time and effort on a few targeted companies. Shortlisting companies before analysis help an investor get the maximum benefit out of his/her effort.
Technical analysis is analysing graphs of past price and trade volume changes of stock across various periods. It entails recognizing patterns in charts containing historical data on the price movement of a stock. The investor who uses technical analysis is only concerned with the stock’s past prices and trading volume data. The investor is unconcerned whether the stock is from a manufacturing, agricultural, or financial services company.
Key Components of Technical Analysis:-
• Price-The market price of a stock is the current price at which it can be bought or sold. Because the price is such an important factor in technical analysis, it is often said that Price Discounts Everything.
• Volume-The volume is commonly reported as the number of shares that changed hands during a given timeframe.
• Time– The timeframe over which you are examining price and volume.
Support and Resistance
- Technical analysts use support and resistance levels on a chart to identify price points where the odds favor a pause or reversal of a prevailing trend.
- Support occurs when a downtrend is expected to come to a halt due to a concentration of demand.
- Resistance occurs when an uptrend is expected to pause for a short time due to a concentration of supply.
- Trend lines, moving averages, and Fibonacci retracement can be used to identify support and resistance areas on charts.
Trend line- A trend line is a line formed around pivot highs or lows to indicate the current price direction. In every time frame, trend lines offer a visual representation of support and resistance. They depict price direction and speed, as well as patterns during moments of price contraction. Some most common patterns are triangle, channel, wedge, etc.
Moving averages – A moving average (MA) is a stock indicator that is commonly used in technical analysis.
- A simple moving average (SMA) is a calculation that takes the arithmetic mean of a given set of prices over a specified number of days, such as the previous 20, 100, or 200 days. Analysts most commonly use 200 DSMA.
- Exponential moving averages (EMA) are weighted averages that give greater weight to a stock’s price in recent days, making it a more responsive indicator to new information. Analysts most commonly use 5 DEMA, 21 DEMA, and 34 DEMA.
Fibonacci retracement levels are horizontal lines that show potential areas of support and resistance. Fibonacci numbers are used to create them. A percentage is assigned to each level. The percentage indicates how much of a previous move has been retracted. 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, 50 percent, 78.6 percent, and so on are Fibonacci retracement levels.
Technical analysis necessitates the use of technical tools such as price, volume, chart pattern, candles, moving average, and so on. Fundamental analysis entails a thorough examination of the company, its management, its balance sheet, financial ratios, and profitability ratios, among other things. These are the essential considerations to keep in mind when performing Fundamental Analysis and Technical Analysis. I hope you found this article helpful. Continue to learn and Happy Investing. To know more related to stock Trading write us at firstname.lastname@example.org
Leave a Reply