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Fundamentals vs Technicals

Trading in the stock market has been known to cause extreme reactions in people. When it’s going well, there’s a sense of euphoria and elation. Everyone’s making money and all is well with the world. However, if its going the other way there is despair and dread at every possible outcome or even the very thought of it.

But a lot of the negative emotions are a result of lack of research and poor judgment on part of the investor who did not spend time and effort to enquire about the heath of the company he was investing in.

Equity trading is both a science and the art. Research and analysis of the stock and the company are key components of investing successfully in a company. In the wake of the recent recession which affected hundreds of companies around the world, their stocks took a beating and the investors in most of them were left in dire straits. However there were some companies who have bounced back and are even showing signs of profit and growth, that too in less than a year.

Those investors who invested in such companies used techniques like Fundamentals or Technicals or both to decide the viability of putting their money into them. Both methods are used in researching and forecasting the potential a company displays resulting in the future growth of their stock.

Let’s take a close look at these two stock picking strategies:

· Fundamental Analysis – This method evaluates a stock by trying to measure its intrinsic value. It does so by using real data like economic, financial and other factors to gauge the value of the stock. Analysts using this method look at the macro-economic factors (state of economy, industry conditions) as well as company related information (financial state, management) to get a fix on the value of a stock. The best part about fundamental analysis is it can be used to determine the value of almost any type of security. Probably the most famous user of the fundamental analysis technique is Warren Buffet. He is well known for employing this technique of picking stocks which have made him into a billionaire and probably the world’s most successful investor.

· Technical Analysis – This method deals with evaluating the value of a stock by examining information generated as a result of market activity. This information includes past prices and volume. The idea is not to measure the company’s intrinsic value but to try and identify patterns which will indicate future activity of the company stock. Technical analysts use charts and other tools to study the historical performance of the company’s stock and thereby gauge its future performance.

To use an analogy, in a shopping mall, the fundamental analyst will go to every single store and study the store and the products and then take a call on whether he should buy it or not. Whereas a technical analyst would observe people going into stores, buying products and would make a decision based on that information.