Both Fundamental and Technical analysis are having equal weight in the stock market. It is very difficult to say which is better or which one should follow to make money in the stock market. The method of finding an investment opportunity in the market with these two techniques are different. One should be well educated and capable to use both the above tools for proper analysis. Fundamental analysis is the oldest method to find investment opportunity or analyze stocks whereas technical analysis has got more popularity in recent times.
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| How to make money from the stock market- Combine Fundamental and Technical analysis |
What is Fundamental Analysis
Let us now understand what is Fundamental analysis. It is basically an analysis of quantitative data of particular sector/industry or company and in-depth study of a balance sheet, income statement, and cash flow. It also analyses qualitative information of company like operations, management, industry trend, order management etc. to calculate the intrinsic value or real market value of a particular company. In nutshell, it is used to find the financial soundness of the particular company and its business prospects.
There are various metrics uses Fundamental analysis to find out investment opportunity in the stock market, below are few of them:
Sales Revenue- to find out total sales of the company, YOY comparison, its percentage of growth, if fall the reason for the fall
Earning per share (EPS)-How much of company’s profit is shared with the stock or invest
Price/Earning ratio (PE Ratio)-The ratio compares the current sales price of a company’s stock to its per-share earnings
Price to Sales ratio- Company’s stock price as compared to its revenue.
Dividend Payout ratio-Dividend payout to the shareholders from the company’s total net income
So above are few key indicators uses while doing Fundamental analysis in the stock market, other then this one can also do a sectoral fundamental analysis. For example during economic slowdown one can select defensive sectors like consumer goods and utilities to get better profit. Whereas financial, auto and IT would be a better choice when the economy is doing better.
Technical Analysis
In the Technical analysis, the analyst studies the chart and its effect on the market for price movement. It basically forecasts the right entry and exit points of a particular stock to maximize the return. While Fundamental analysis is mainly for the long-term investment view but in the case of Technical, it is useful for short-term or intraday trading in the stock market.
Below are few tools a chartist or technical analyst are using.
Stock price trend: It shows the trend of particular stock whether it is uptrend or downtrend, the trend may be short term and long term also.
Moving Average: It helps to determine average trend direction, for example, 50 days moving average indicates average price over past 50days
There are several other technical tools like Moving average convergence and divergence (MACD), Relative Strength Index (RSI), Fibonacci Retracement etc helps to determine trends and entry and exit points of a stock.
If we compare both Fundamental and Technical analysis, Fundamental is used for long-term traders whereas technical is used by the short-term or intraday traders. Fundamental is deals with micro and macro data of the economics as well as the particulars company and sectors quantitative data whereas Technical analyst believes that price chart has all the information. Technical Analysis helps investors to manage risk in a better way whereas Fundamental analysis helps to find out multibagger stocks. Both the tools have some unique features to find out right opportunity in the stock market.
How we can combine both Fundamental and Technical Analysis to gain more
One should do the sector analysis as mentioned above before picking up the stock. Once the stock is selected then financial soundness should be checked by studying balance sheet, income statement, cash flow etc. After selecting the stock one should also satisfy other fundament factors as mentioned above. One should do a thorough analysis of all fundamental metrics as discussed above before selecting any stock.
Once the stock is selected then technical analysis to be done for the right time entry of that particular stock. All the technical parameters discussed above to be checked to make a right entry into that stock. A technical analyst would like to buy when the moving average is trending upwards and the price pulls back a touch to allow for a good “entry point” into the stock. Similarly one should also exit the stock based on the technical chart. One should always keep stop loss to minimize the risk.
If an investor combines Fundamental and Technical analysis both, the combination will not only help the investor to select right stock at right time but would also help to book profit at right time. One can easily make money from the stock market with a combination of both Fundamental and Technical analysis.
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Happy Investing
Finogyan Team
