BackAsk Mint | Fundamental, technical analyses help investors find winning stocks
Ask Mint | Fundamental, technical analyses help investors find winning stocks
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Johnny: Tell me first of all, what exactly is involved in fundamental and technical analysis?
Jinny: Before making any investment decision, all of us need some method of finding out the next success story. There are two most common methods of analysing securities—fundamental analysis and technical analysis. These two kinds of analyses greatly differ from one another. While fundamental analysts try to find the real long-term worth of securities by looking at financial information such as earnings, assets value and so on, technical analysts look at the past and present price movements along with volumes to discover the short-term market trend. Fundamental analysts use financial statements such as balance sheet, cash flow statement and income statement whereas technical analysts use charts as well as other technical indicators like MACD (moving average convergence-divergence), which can help in identifying a pattern in the price movements.
Also Read Shailaja and Manoj K. Singh’s earlier columns
Johnny: What are the different assumptions behind technical and fundamental analyses?
Jinny: Technical analysts use three most basic assumptions. Their first assumption is that prices of securities reflect all known and unknown factors and hence a separate analysis for finding out their true worth is not necessary. Their second assumption is that prices are not random but follow a trend over a period of time and their third and more revolutionary assumption is that past trends in all probability repeat themselves. So the real art of the technical analyst lies in identifying the exact spot on a price chart where the prices are likely to either move up or down. Fundamental analysis on the other hand relies on different assumptions. First of all, fundamental analysts believe that it is really possible to find out the true worth of a security by carefully analysing all available financial information along with general macroeconomic conditions. Second, fundamental analysts believe that in the daily push and pull of the market, the prices of securities often get out of sync with the true value of securities. So the aim of fundamental analysis is to identify stocks that are either overvalued or undervalued. Fundamental analysts believe that in the long run, the market price of securities converge with their true value.
Johnny: It seems technical and fundamental analyses stand apart. Tell me Jinny, is there any common ground between them?
Johnny: It seems you can conquer the world if you have technical and fundamental analyses by your side.
Jinny: Most of the time you can be at the right place at the right time by using both fundamental and technical analyses together. But sometimes you may actually land at the wrong place. If conquering markets had been so easy, we would have never seen anybody lose. Sometimes freak moments are more powerful than your charts and earnings forecasts.
Johnny: Thanks for telling me all this. Sometimes you win sometimes you lose; life is full of red roses and moody blues.
What: Technical and fundamental analyses differ in their approach but both of them can serve as useful tool in making investment decisions.
How: Fundamental analysis relies on financial information like earnings and asset value whereas technical analysis uses price movements and volume.
Whom: Fundamental analysis suits long-term investors whereas technical analysis suits short-term investors.
Shailaja and Manoj K. Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write to both of them at realsimple@livemint.com
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