One of the critical elements that can help you become successful in the stock market is the type of research and analysis that you conduct to forecast the possible trends in the market. Based on the analysis and the research it is possible to build a solid strategy which can help you earn attractive returns from the market. While the results of conducting proper research have the tendency to prove highly beneficial, the process is a rather complex one. There are specific strategies which have already been developed by the seasoned traders. However, blindly following a strategy may be counterproductive. One needs to have a clear idea as to what exactly the goal of the investor is to make the most of the various strategies in place.
In this article, we will be discussing two of the most popular investment strategies in the share market, i.e. the technical analysis and the fundamental analysis. Here you will also find the inherent differences between the two, which will help you decide which one is more suitable to your personal investment attitude and goal.
The thing that you need to understand when delving into the concept of fundamental analysis and the technical analysis is that these strategies are based on two different schools of thoughts; thus they stand at the opposite ends of the stock market strategy. Both these strategies have their supporters and detractors at the same time. However, their importance in the market cannot be stressed enough as they are essential parts of study when considering the fundamentals of stock market.
The Concept of Fundamental Analysis
Fundamental analysis is a comprehensive and expansive analysis. It can be defined as a method that is based on an evaluation of the securities by measuring the stock’s intrinsic value. This type of study involves a thorough analysis of all the factors involved in the stock market and sometimes beyond. Some of the primary areas of study include the economic conditions, industry conditions, financial conditions, and even the management of the companies. There is also a wide range of characteristics that play an essential role in the fundamental analysis. Characteristics like assets, liabilities, earnings, and expenses are important parts of this sort of analysis.
Fundamental analysis has helped many companies and individuals get good results in the stock market. This has helped its adoption and implementation. This analysis is significantly different from the other dominant type of stock market analysis – technical analysis.
The Technical Analysis Discipline
The primary point of difference between technical analysis and fundamental analysis lies in that in technical analysis the stocks volume and price are the only inputs. The assumption behind this strategy is that all the known fundamentals are already factored into the price; thus, it is believed that it is unnecessary to analyse the other factors that are present in the fundamental analysis. The analysts in the technical analysis do not measure the intrinsic value of the security. Instead of that, they utilize stock charts to understand and identify trends and patterns in the market on the basis of which stock behaviour of the future is predicted. The types of technical analysis that are particularly common in the present day stock market is support and resistance, simple moving average, momentum-based indicators, and trend lines.
Types of Technical Analysis
In support and resistance analysis price history is used. Support means the areas where the buyers have been involved before. Similarly, those areas where the sellers have previously delayed or prevented price advances is known as resistance. Ideally, the investors should aim to purchase at support and sell at resistance.
When it comes to the simple moving averages, these are the indicators that help the investors or the analysts assess the trend of stock by simply averaging of the stock’s daily price over a significant period of time. Once the moving overage of the shorter duration overtakes the moving average of the longer duration, sell or buy signals are generated.
In the momentum-based analysis, there are multiple indicators that the analysists can use. Some of the common indicators, in this case, are Bollinger Bands, Stochastics, Chaikin Money Flow, and Moving Average Convergence Divergence, (also known as MACD). The buy and sell signals here are dependent on a number of criteria as each of the indicators have different complex formulas. The strategy of analysis is most suitable for those markets that are trendless or range-bound.
The trend lines are very similar to the support and resistance analysis. Here too, there is a pre-defined entry and exit points. The difference between the two is that in trend lines the projections are made on the basis of past performance of the stocks. They are mainly used for the stocks moving to new highs or lows when there is no history of the price.
Tips to Pick the Correct Method
There have been many debates as to which type of analysis is better between fundamental analysis and technical analysis. However, in this regard, there may not a specific answer to the question. These can be looked at as two different routes for two different people. For those people who prefer reading charts and focusing on trends, they may prefer the technical analysis, whereas those investors who like to make investment decisions on the basis of growth, financial and EPS, for them fundamental analysis is a better choice.
There are also a select few who believe that there is a place for both of them and both these strategies can be used to predict the market behaviors. Ultimately, it boils down to the individual’s trading attitude and style. The type of analysis that an investor picks should be based on the style and the attitude of the trader. There have been many investors who have combined results of both the analysis and yielded good results. Similarly, there have also been many cases where each of these analyses individually earned the investors a lot of money. Thus, the first and foremost thing that an investor should do is to understand and identify what type of a trader one is and then choose the right form of analysis.
