Sample donated: Antonio Carroll
Last updated: September 21, 2019
Fundamental analysis is a way to measure the intrinsic value by considering the economic, financial and other quantitative and qualitative factors. Fundamental analysis can be classified into various models like Discounted Dividend Model (DDM), Discounted Cash Flow Model (DCFM) and Residual Income Model (RIM) out of this the best model is Residual Income Model (Ahmed S Wafi) .
Fundamental analysis helps daily traders to take investment decisions. Under fundamental analysis we compare the intrinsic value with the prevailing market price. If the stocks intrinsic value exceeds the market price, it makes sense for the fundamental investor/trader to buy the stock. This paper supports the idea that utilization of both investment techniques would lead into more successful investing decisions for equities traders. The biggest part of fundamental analysis involves delving into the financial statements and performing a quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of accompany to gain insight on a company’s future performance. When talking about stocks, fundamental is a technique that attempts to determine a security’s value by focusing on underlying factors that can affect a company’s actual business and its future prospectus. On a broader scope, fundamental analysis can be performed on industries or the economy as a whole.
One of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock’s real value but in the long run, the stock markets will reflect the fundamentals. The biggest criticisms of fundamental analysis come primarily from two groups the proponents of technical analysis and believers of the efficient market hypothesis (veliota drakopoulou, 2015). Technical analysis is a method that uses pattern in market data to identify trends and make predictions, in simple words technical analysis is a tool employed to evaluate securities and try to forecast their future movement by analysing statistics gathered from trading activity such as price movement and volume. The researchers use three model based on Japanese and American market to examine the predictability and profitability of financial market such as Nonlinear prediction Model, bagging Algorithm and selection of stocks through two steps: the first step is to select more predictable stocks during the learning period and then the second step adaptively and dynamically selects the most confident stock showing the most significant technical signal in each investment (ohkura, 2015). In finance, technical analysis is a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioural economics and quantitative analysis incorporated substantial aspects of technical analysis, which being an aspect of active management stands in contradiction to much of modern portfolio theory. According to the weak- form efficient-markets hypothesis, such forecasting methods are valueless, since prince follow a random walk or are otherwise essentially unpredictable.
The principles of technical analysis derive from the observation of financial markets over hundreds of years. Many more technical tools and theories have been developed and enhanced in recent decades, with an increasing emphasis on computer- assisted techniques. Technicians say that a market’s price reflect all relevant information, so their analysis looks at the history of a securities trading pattern rather than external drivers such as economic, fundamental and news events. Price action also tends to repeat itself because investors collectively tend toward patterned behaviour- hence technicians focus on identifiable trends and conditions. Technical analyst believes that price trend directionally, that is up, down, sideways or some combinations. (technical analysis, 2011)According to the comparison made by the researcher about the credibility in forecasting the value (price and return) of the shares of both technical analysis and fundamental analysis, technical analysis the most favouring method but this study was based on Egyptian markets which is inefficient financially but this results matches with some of the studies which were applied in the emerging financial markets (Wafi A, 2015). If the investor believes in reading chats and looking at trends, then the investor has the mind set for technical analysis.
If the investor believes in making investment decision based on financials, growth and EPS, then the investor favours fundamental analysis. Both the analysis is useful for examining market action it’s just that they both have a different school of thought. The trading style of the investor can be used as the main factor for determining the kind of analysis beneficial for them. Investors can either combine both the analysis or concentrate on one. The main difference between the fundamental and technical analysis are fundamental analysis evaluate company’s stock to find its intrinsic value and analyse factors that may affect the price in the future and it uses financial data, industry trends, competitors performance and economic outlook and fundamental analysis is a long term approach by considering past and future factors. It is based on Return on Equity (ROE) and Return on Asset (ROA). Whereas technical analysis is a statistical method used to find out pattern and predict future movements based on past market data and it examines both price movements and market psychology.
Technical analysis is a short term approach and it and it only consider past records. It is based on Dow Theory and Price Data. (thakur)