Stock Analysis Demystified: A Guide to Fundamentals and Technicals
When entering the world of stock evaluation, you encounter a plethora of metrics and parameters. Overall, these can be divided into two main methods: Fundamental and Technical analysis.
Fundamental Analysis: A thorough examination of a company’s financial statements and metrics to assess its economic health.
Fundamental analysis is a method within technical systematic, used to identify trading opportunities by analyzing trends with a focus on patterns. Investors employ fundamental analysis to calculate the true underlying value of a stock. Using published metrics, one can assess whether a company is worth investing in or not.
This method goes beyond merely determining the value of a security; it can also be used to examine entire industries and the overall economy. The analysis fundamentally aims to determine value through the company’s or market’s fundamental factors. Although the method can be broadly applied, it is primarily used in connection with stock investments.
The analysis can be divided into quantitative and qualitative factors. The quantitative factors are measurable and expressed as numbers or values, such as revenue, earnings, shares, and debt. In contrast, qualitative factors are more complex and include aspects such as brand strength, management quality, and future prospects. Quantitative factors are typically more accessible, as a company’s metrics are precise and easily analyzable. On the other hand, qualitative factors are more challenging, as they cannot be directly measured with numbers.
The essence of fundamental analysis is often linked to the concept of intrinsic value. This refers to the idea that stocks are not always priced correctly in relation to their real value. Fundamental analysis relies on the assumption that stock market prices in the long term will reflect the company’s intrinsic value. However, the challenge lies in predicting how long it takes for the market to catch up to the real value and the uncertainty of how accurate one’s value estimation is.
What you should know about fundamental analysis, also called stock analysis or company analysis, involves a comprehensive assessment of a company’s financial performance. This includes reported profits, sales, and metrics such as P/E and EPS, which contribute to evaluating the company’s financial condition and growth potential. Fundamental analysis requires insight into each company, its market, and future trends. Most consider fundamental analysis especially relevant for long-term investments. It can quickly seem overwhelming, but with Horizon Finance and our platform, it has never been easier.
Technical Analysis: Focuses on examining a company’s historical price movements to predict future patterns.
Technical analysis does not answer the question “what should I buy?” but rather “when should I buy?”. It involves statistical analysis of trading information. Users of technical analysis do not try to determine whether a stock is over or undervalued, as in many other cases. Instead, they assess whether the stock’s price is expected to rise or fall based on previous trading history and past patterns in price movements. Technical analysis represents an approach to securities analysis with the aim of predicting future price movements.
The method involves using various charts and indicators that enable the analysis of supply and demand in the market. The market price is determined by the dynamics between supply and demand, so by predicting these factors, one can also predict future price developments. Technical analysis is not limited to stocks alone but can also be applied to commodities such as gold, currencies, and other asset types.
The philosophy behind technical analysis is that price movements do not occur randomly. Patterns are formed in these movements, based on investor psychology. In contrast to fundamental analysis, which focuses on a company’s fundamental figures such as revenue and earnings, a technical analyst solely concentrates on how the price is evolving.
Prediction through Patterns Technical analysis focuses on the historical price movements of stocks with the aim of predicting future developments based on identified patterns. The method is based on the assumption that stock markets trade rationally and create patterns that allow for forecasts. Technical analysis attempts to identify and understand these patterns without necessarily focusing on the events underlying price developments.
Although fundamental changes in a company usually do not occur between quarterly reports, stock prices are rarely constant. Technical analysis is particularly useful for short-term investments.
Fundamental analysis and technical analysis constitute two distinct approaches to market analysis. Fundamental analysis uses a long-term approach and examines data over several years, while technical analysis often operates within a timeframe of weeks, days, or minutes.
Fundamental analysis focuses on the actual characteristics of a company, while technical analysis concentrates on identifying patterns and trends in price and volume data. Gaining profit from an investment can take a long time to materialize with fundamental analysis, while technical analysis is oriented towards short-term trades.
In other words, while technical analysis delves into price and volume movements, fundamental analysis directs its attention to a thorough review of a company’s financial reports, statements, and management’s statements to assess its potential and value.
Relevant Metrics: What They Mean for Your Analysis By analyzing a company’s financial statements and conducting your own stock analysis, it is important to be familiar with various metrics. These metrics can be crucial for forming a holistic picture of a company’s health and potential.
Always remember to view any analysis with a degree of skepticism and tailor it to your own investment horizon and risk tolerance. Investment opportunities can both rise and fall in value, and there is always a risk that you may not get back the invested money. Historical returns are no guarantee of future returns.
In conclusion, the challenges of stock research can be a struggle for many investors. However, Horizon is changing the game by making the process faster, simpler, and more cost-effective. By subscribing to Horizon, you can simplify your stock research and make confident investing decisions with ease.