Technical and Fundmental Analysis in Stock Market
We have heard the word technical analysis many times. What is technical analysis? Nobody will have a right answer. It is a prediction of the price movement of a security by analyzing its past price movements, primarily price and volume. Many factors will be used to predict the future price of the security. There are fundamental analysis and technical analysis to predict the stock market movements. Fundamental analysis gives a long term picture of the stock where technical analysis gives short term movements of the security. Fundamental analysis is a measurement based on the intrinsic value of the company. Fundamental analysis studies overall economy, track record of the company, financial conditions and credibility of the management.
There are two types of technical traders. One is traders, they are the fans of charts and another is the people who are trading with the help of oscillators and technical indicators. They are just thinking about the price movements in the history and the future movement possibilities. The technical consultants argue that market discounts every fundamental data of the company. If there is a trend occurred, there is 90% chance to follow the trend. That is effectively used by smart technical analysts. Most technical trading will be done by this assumption.
By studying balance sheet, income statement and cash flow statement, fundamental analysts find the intrinsic value of a stock. If the price of a stock is trading below its intrinsic value, it will be a clear buy. If the price of a stock is valued above its intrinsic value, it will be counted overvalued. Investors should not tempt to buy overvalued stocks.
Fundamental analysts are the supporters of long term investment but technical analysts are supporting short term. It may take a long time to reflect the actual value of a company. This process is also called value investing. Warrant Buffet is a world famous value investor. Value investors may wait for a time of years to cash the stocks.
Fundamentals are the actual characteristics of a business. Nobody can rich by one night. One has to wait. We are investing in a business and it has to be grown. Technical analysis is used for trading, especially short term trading while fundamental analysis is used for investing, particularly long term investment. Investors are trying to increase the value of the holdings where traders are trying to transfer the assets to somebody. Many stock analysts are combining both these schools together to make advantage from it.
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