Understanding Fundamental and Technical Analysis
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What is Fundamental Analysis? • Fundamental analysis is done to identify the true intrinsic value of an asset/ security. • A fundamental analysis involves understanding the factors impacting company’s valuation from multiple lenses (macro as well as micro). • The purpose of fundamental analysis is to estimate the value of the security and then compare it with the current market price to decide whether the security is under or overvalued; and does it make sense to invest in the security at current price for long term. • It is about value creation from Long term investment opportunities Email: Support@skillfinlearning.com
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What should we look at before making any decision?
$$ Historical Performance of the Company
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Management/ Strategic Priorities
Industry and Economic Scenario
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Implied expectations in Current valuations
Historical Performance • Analyzing historical financial performance of a Company is important to understand:
The Company’s business/Segments Performance of the Company on Growth, Margins, Return on invested Capital during the selected time frame. Drivers of under/out performance vs peers.
• Apart from performance, it is also important to understand the balance sheet strength by looking at liquidity, leverage, coverage ratios, credit rating during the analysis period.
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Management Strategy • Understanding the management and the Corporate vision and strategy is equally important. • A fundamental analyst looks at the Company strategy/ vision to understand the priorities of the business over next few years. Whether it is increasing growth through introduction of new products or geographies, cost reduction to improve returns/ margins, increasing customer satisfaction by providing omni-channel experience, reducing leverage etc. • A fundamental analyst also looks at the management history, education and tracks record on how they have delivered on promises made to the investors in the past and forms a perspective around management credibility. Email: Support@skillfinlearning.com
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Industry and Economic scenario • Fundamental analyst tries to keep himself up to speed on the industry and economic scenario, change in government policies/ regulations. • Understanding the industry and Macro Economy scenario, consumer preference helps determine the market momentum behind the stock price performance • Government policies, regulations (like providing relaxation to select sectors) could also impact the financial performance of a Company. Email: Support@skillfinlearning.com
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Market implied expectations
• Value of stock is driven by Growth, Returns and Investor Expectations. • Understanding expectations around future performance that are embedded in the current stock price is important. • This will help the analyst determine how the stock’s value would change with change in future performance.
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Fundamental Analysis
• In short, Fundamental analysis focusses on understanding “WHY” the Stock Price is “WHAT” it is • It is more about value creation from Long Term Investing
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What is Technical Analysis? • Technical analysis involves forecasting the future price movements of a stock based on an understanding of past price movements. • The Technical Analyst looks at the short term, long term stock price charts, and indicators (like Resistance, Support, Bollinger bands, Relative Strength Indicators etc.) to predict the future price movements.
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3 Assumptions behind Technical Analysis • Current asset/ security Price discounts all material information which is known to the market. • Stock Price moves in trends. Once a price trend is established, the future price direction is more likely to be in that direction. A Technical analyst buys stocks when prices are low and investor “FEAR is at PEEK” and sells stocks when stock prices are high and “GREED is at PEEK”. • History tends to repeat itself. In Technical analysis, the charts and patterns found in the past often gets repeated. Technical analysts use different indicators (Resistance, support etc.) to identify the patterns in the stocks. Email: Support@skillfinlearning.com
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Technical Analysis
• In short, Technical analysis focusses on “WHAT” the Stock Price is and not “WHY” it is • It is more about short term investing and taking advantage of the stock price movements
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