Fundamental analysis vs. technical analysis
Private and institutional investors use fundamental analysis as the basis for buying stocks, while short-term traders use technical analysis. Since the profit and risk coefficients used in investing and trading, as well as the time horizons are very different, both methods of trading stocks can be effective.
The fundamental analysis relies on long-term information on economic demand and supply and short-term data on the company’s financial position. The investor receives information about this through reports of companies. Investors are more interested in the behavior of the stock for many years than the current market situation. They do not care if today in the market there are sharp drops down, and tomorrow – up, because their goal is a steady, conservative growth.
Although fundamental analysis provides very valuable information, most people do not have the time and knowledge to study it. Fundamental analysis takes into account such factors as the potential of the company’s new products, compares profit in the past and at present. A lot of statistical data is used – one type of such statistics is EPS (net earnings per share). Net profit per share is calculated by dividing the company’s total profit, net of taxes, by the total number of shares outstanding. At the same time, specialists compare EPS of the company of interest with other companies in the sector to see how you can earn in this industry.
Technical analysis is an alternative method of stock research, focused on studying the calculation of time, price fluctuations and the behavior of large buyers and sellers. The most common method of technical analysis is the study of charts that show the history of stock prices. We know that the price takes into account everything. The prices presented in the chart do not appear arbitrarily, but are the result of a collective point of view of all investors who participate in its formation. Each trader has his own chart types and his own set of indicators, which he uses to determine the entry point to the market, and exit points. Analyzing the charts, a trader can try to predict the mood of the market and the movement of the price per share, but in general terms, technical analysis is not an objective science.
Technical analysis and fundamental analysis are the two main types of thinking that investors and traders use when choosing stocks. In stock trading on the exchange, you must rely on your own financial knowledge when you decide to be a day trader or an investor, and what is more convenient for you is technical or fundamental analysis.