There are staunch adherents to both fundamental and technical analysis that are so entrenched in their beliefs that they seem to regard one another like warring states. In simplest terms, fundamental analysts crunch numbers and technical analysts read charts. According to West Capital International, people tend to have a bias one way or the other, but in reality most use a combination of the two when assessing a potential investment.
Often people will start with fundamental analysis to establish a company’s value and then employ technical analysis to double check market trends and timing considerations. Ideally, investors should look for stocks that are trading below their value to improve the odds of having strong overall rates of return. Combining insights gleaned from both fundamental and technical analysis provides the best chance for success, and both are key to the superior rates of return generated for clients of West Capital International Japan
Fundamental analysis is the process of evaluating securities by using information from financial statements to measure the intrinsic value of a stock. Intrinsic value refers to the fundamental value of a security, without regard to its price or other market trading factors. Fundamental analysts study everything from macroeconomic and political issues, to company management, products and major competitors. Demographic trends can be relevant, and sometimes an analyst will go so far as physically visit the company.
Data analysis is the basis of fundamental analysis, and should include past and present information to try to forecast how the company will perform in the future. Fundamental research includes data such as revenue, liabilities, expenses, earnings per share, profits, assets, cash flow and projected earnings and other future growth rates. Key ratios for examination include price to earnings, ROI return on investment, dividend yield, book value and P/B (price to book) among others. Once the analyst has crunched all these numbers, they would compare them to other stocks in the market, sector and industry and ultimately try to come up with the companies with the best prospects of increasing in value and price.TECHNICAL ANALYSIS
Technical analysis, in contrast to fundamental analysis, uses only historical price and trading volume data to forecast the future price of a particular financial asset. Technical analysts use charts to try to identify patterns and trends that infer future price movement. That’s it – nothing else. The theory is that all of the information is priced in to the market, making fundamental analysis redundant.
Within the realm of technical analysis there are several schools of thought. Better known include Dow Theory, Elliott Wave Theory and Candlestick Charting. The basic premise is the same: using price trends and patterns to forecast the likelihood of future price movement. Depending on the underlying security and the analyst, future could refer to anything from an hour to a decade away.
While at first it may sound like reading tea leaves, there is a method to their madness. Technicians take in to account details like overall trends, specific chart lines of support and resistance and variations in trading volume that indicate buying or selling momentum. Put/call ratios are another useful technical indicator.
One popular form of technical analysis is the study of simple moving averages. These average the daily price of a security over a fixed period of time. When a shorter duration line moves across a longer duration line, buy and sell signals are generated.
Support and resistance lines are another often used technical tool utilizing price history. Support is a floor of sorts, where prices have come down low enough for buyers to step in to the market. Resistance is an upper ceiling where selling pressure will make further price advancement more difficult. Prices rebounding from a support line may be a buy signal. Prices rebounding from resistance suggest an intermittent top; but note that for long term investors this is not a clear sell signal.
Trend lines make projections based on how something has traded in the past and are another helpful tool for defining ideal entry and exit points for an investment. They differ from support and resistance levels and are more useful for stocks with a shorter price history that are hitting new highs or lows.
THE WHOLE IS GREATER THAN THE SUM OF ITS PARTS
The West Capital International Japan research department believes that the best decisions are derived from the synthesis of the best available data. Both fundamental and technical analysis provide information and common sense dictates that both ought to be taken into account when making investment decisions. Many analysts use fundamental analysis to assess the value of an investment and seek confirmation and timing indications through technical analysis. This article is not to be taken as advice on any particular investment theory, but rather to provide investors insight into the general process of West Capital International