Having knowledge of stock analysis to select the right stocks is important in being a successful investor.
There are two commonly used methods to evaluate the value of a stock – fundamental and technical analysis.
Fundamental analysis looks at the economic and financial factors that widely influence a business.
Technical analysis, in contrast, focuses on the price movement of stocks, and uses that data to predict future trends.
This article explains the differences, weaknesses and techniques of the two approaches, and how they can be used simultaneously.
Fundamental analysts starts with researching a company’s value by looking at its income statements, balance sheets and cash flow.
Essentially, this approach measures a company’s intrinsic value at the time rather than at a future projected date.
Stocks with a share price below the intrinsic value are typically considered golden opportunities for investment.
Technical analysis, meanwhile, does not look at a company’s financial statements but rather its stock price, as this approach maintains that all relevant data and information is reflected in the share price.
This analysis focuses on the stock chart for highs and lows, clues pointing towards where the share price may be heading.
Fundamental analysts take a long-term approach towards investment.
Fundamental analysis data often looks back to past quarters or even years.
Investors using this approach often play a long game, even before a company’s intrinsic value is reflected in the market, if at all.
They may assume the stock price is currently not where it should be and that this will be corrected some time in the future, with this ranging from perhaps just a few months to several years.
Fundamentally focused investors analyse a company’s quarterly annual financial statements as well as earnings per share that do not change daily.
Companies’ activities generally do not change much overnight because new products, development marketing strategies and implementing other strategies to improve and develop the business require time.
Technical analysts, on the other hand, take a more short term approach towards looking at whether a stock is worth investing in.
Technical analysis uses more frequently generated price and volume data from the most recent dates for research and predictions.
This timeframe can be just a few weeks beforehand.
Technical analysis and fundamental analysis are carried out with different goals.
Technical analysts aim to identify short to medium term trades that investors can flip easily and make quick gains, whereas fundamental analysts aim to make long-term investments in a stock’s underlying business.
Much of the criticism of technical analysis is centred on the efficient market hypothesis (EMH), which states that any past trading information is already reflected in the price of a stock.
Veterans of the industry see this approach as a simple guess and would prefer fundamental analysis over technical analysis due to its more detailed supporting data.
Technical analysis and fundamental analysis are often seen as opposing approaches towards researching securities, but investors can find success by combining the two.
Investors can use fundamental analysis to help identify an undervalued stock and technical analysis to find specific entry and exit points.
Primarily technical traders also often look at fundamentals to support their trading decisions.
There are benefits in understanding the two approaches as to whether or not to follow either or both of them.
Analysis cannot be a guaranteed forecast of future events.
Stock prices fluctuate from various risk factors, including but not limited to economic and political instability, market conditions or events affecting particular industries or companies.
It is up to investors to set their own philosophy and decide which strategies are best for them.
Contributed by: The Cambodia Securities Exchange, Market Operations Department
Tel: 023 95 88 88 023 95 88 85
Disclaimer: This article has been compiled solely for informative and educational purposes. It is not intended to offer any recommendations or act as investment advice. The Cambodia Securities Exchange is not liable for any losses or damages caused by using it in such a way.