For people who think only suit wearing professionals can beat the market!
There is an examination next week. The hardworking kid studies day and night preparing for the examination. Another kid (let’s just call him clever kid) has not prepared anything for the exam. The clever kid asks the hardworking kid to explain everything to him briefly. The hardworking kid explained whatever he could in a couple of hours to the clever kid. Both kids pass their exam successfully.
And just like that we now know the two most popular types of stock market analysis!
For most beginners, the stock market is a mysterious yet fascinating place. Many fancy terms such as topline, haircut, ROE, NPA, etc. are thrown around and things start to get really confusing. However if you look beyond the smoke & mirrors, analyzing stocks is not exactly rocket science!
There are two major ways for stock analysis –
1. Fundamental Analysis (Hardworking Kid)
Everyone of us knows a person who always has financial troubles. Either their earnings are stagnant and/or their expenses keep on growing. That’s because all of us are governed by a simple rule in life.
PROFIT = INCOME – EXPENDITURE
The fundamentals of a company can be analyzed in a similar manner. A company which is unable to generate more income and/or unable to limit their expenses is doomed to fail. Add debts to the equation and more critical analysis needs to be done to understand the financial health of the company.
The biggest advantage of Fundamental analysis is the ability to identify great companies which manage their financials well and rewards the shareholders. This requires a lot of hardwork to read the company quarterly results, understand the company financials, estimate how the company plans to get out of debt, etc.
However, fundamental analysis is not perfect. Because stocks do not move based on the company fundamentals! Want to know why? Visit – Why don’t Stocks move based on Fundamentals?
This brings us to the second type of stock analysis.
2. Technical Analysis (Clever Kid)
One of the most fascinating aspects of the stock market is watching the stocks prices go up & down every second. But the fundamentals of the company do not change every second (rather they don’t even change weekly). But what makes the stock price go up or down? The answer is exactly what makes the price of anything go up or down – supply and demand.
If a stock has a lot of buyers it’s price will increase & if a stock has a lot of sellers it’s price will plummet. It has nothing to do with the company’s financials, annual reports or recent results. If everyone tried to sell a stock at the same time for any reason, the stock price will crash.
This is where technical analysts come in. There is only one mantra in technical analysis –
PRICE IS SUPREME
Technical analyst (just like the clever kid) relies on the knowledge of others (hardworking kids) and takes advantage of it. If a wealthy investor or a mutual fund identifies a great company using fundamental analysis, they will buy lots of shares of that company. Buying of shares will be reflected by the increase in the price of that share. And since a technical analysts follows only the price, he gets the information that the stock is in demand.
Technical analysis is a great way to tag-along with big players of the market and make money by just following the price. By assuming the fact that there is a big player running the show and simply mimicking their strategy, a technical analyst is able to succeed.
Now that you know about the two major tools at your disposal to analyze stocks, it is up to the reader to identify the analysis philosophy best suited for them to make money!
Contact me at investmentabshuru@gmail.com
- 4 Types of Stocks which Long-Term Investors should avoid! - May 6, 2023
- Why do some companies trade at a very low P/E multiple? - November 1, 2022
- Why most investors end up buying stocks at the wrong time? - October 26, 2022
I will immediately snatch your rss feed as I can not find your e-mail subscription link or newsletter service. Do you have any? Kindly allow me recognize in order that I may subscribe. Thanks.
Hi!
You can subscribe to the website using the subscription box on the right for updates on new articles.