Beginners guide to Technical analysis and fundamental analysis

Importance of Technical analysis and fundamental analysis

Here we are going to learn how to select a stock for investing or trading. What are the factors you need to consider before picking a stock to invest in for the short term and long term?

You can participate in the stock market in two ways

A trader can invest in stock in two ways long term and short term

• Long-term: In the long term investment trader will get the benefit of capital appreciation and dividends from the company.
• Short term: in this method trader follows positional trading, swing trading, and intraday trading.

How to select the stocks for long term investment(using Fundamental analysis)

Fundamental analysis of a stock will help the trader to take a decision on investing in shares or not.

Fundamental analysis Overview

Fundamental analysis needs to analyze two factors, one is qualitative analysis and quantitative analysis of stocks. It’s a method to analyze a business.

In qualitative analysis, the trader will check many factors

• What is the business model for the company
• What is the future for the company
• How’s the performance of the company
• How’s the industry works
• How’s the management

In quantitative analysis, the trader will check the many factors

• Balance sheet
• Profit and loss
• Cash flow

After all these analyses the trader can calculate the intrinsic value which helps the investor to make a decision. Intrinsic value is considered the value of a business. After the analysis of intrinsic value, we can take a decision whether need to invest or not.

Technical Analysis Overview

Technical analysis is another method of fundamental analysis which widely used in short-term investment. The major factors of technical analysis are

• Price movement
• Trends
• Volume
• Charts

In technical analysis, investors use different methods to invest in shares. Most of the investors focus the price movement because they think that it follows a certain pattern.

For the best investment strategy, the trader should invest 60% of your investment money should invest in long-term investment and 40 % of investment money should invest in a short-term investment.

Fundamental analysis

Fundamental analysis is mainly used to evaluate the stock to invest in. Fundamental analysis is mainly used in long-term investment. The benefit of long-term investment is capital appreciation and dividends. Compound growth is the reason for capital appreciation.

What are the skills required for fundamental analysis?

• An investor should have passion and interest

When an investor plans for a long term investment he should have passion and interest in following certain areas like

• How’s the performance of the company
• Performance of the management
• Industry growth
• Future of the company

If the investor follows all of these it will be easy to get familiar with the company and the industry.

• Data availability

An investor should know from where will get the data for fundamental analysis.

• Basic understanding of mathematics

For some calculations investors should have a basic understanding of calculation it will help the investor to calculate many ratio analyses.

The investor should try to study 3 important factors includes Management, Business, and valuation. From all these, we can calculate the intrinsic value of the company. It will help the investor to make decisions.

 

Qualitative Analysis                                                        

What are the elements included in the Qualitative analysis

• Business model: the investor should analyze the business model of the company. These analyses help the future growth of the company.
• Management: in this area need to focus on who all are in the management team, the qualification of the leadership, how was the salary distribution (the percentage allocation from the profit).
• Ethics: it mainly focuses how the management team’s attitude towards ethics and how they treat the shareholders.
• Corporate governance: How satisfied the employers
• Industry: In this area, we can look into the industry growth, the potential of the industry.

Where do you get the data for Qualitative analysis?

• Annual report

The annual report is published by the company. From this report, we can do a qualitative analysis. This report contains management messages, future plans, etc.

• Website

We can follow media and news like money control

• Industry association

From the industry association, we can identify the details like industry growth performance of the industry.

Quantitative Analysis

What are the elements included in the Quantitative analysis

• Growth and profitability
• Margin
• Earnings
• Expenses
• Debts
• Assets
• Liabilities
• Investments

Where do you get the data for Quantitative analysis?

• Profit and loss account
• Balance sheet
• Cash flow

These all details find in the annual report of the company

How to download the Annual report

There few ways you can download the annual report of the company

• Company’s website
• NSE website
• screener.in

Technical Analysis

Who all are using technical analysis?

• Intraday traders: closes a trade within a day
• Short-term investors: closes a trade in 2 days to 3 months.
• Medium-term investors: closes a trade in 3 months to 1 year

In technical analysis, investors work on the assumption that all information is already associated with the current market price. Technical traders believe that price movement happened in the stock market is not a random one. It follows a certain repeatable pattern. If they can analyze the pattern or move they can be utilized to gain profit.

They forecast the price of the stock using technical analysis and come with an entry point and exit point.

There are a few methods widely used in trend analysis.

Trend analysis

This is one of the general directions of a market movement. There are 3 types of a market move

• Upward trend
• Downward trend
• Sideways trend

Candlestick

Candlestick patterns are specific patterns that give the trader an indication of the market sentiment

• Doji candle
• Hammer candle
• Piercing pattern
• Tweezers pattern
• Engulfing candle

Chart patterns

It is similar to the candlestick pattern. It forms a direction of the movement of the price.

• Double tops/ bottoms
• Ascending/descending triangles
• Head and shoulders
• Channels( bullish and bearish)
• Flag patterns (bullish and bearish)

Support and resistance

Support and resistance refer to the price level of the stock within the market. Once it breaks the support or resistance it becomes the opposite of what it was before.

Commonly used technical indicators

• Stochastic oscillator
• Moving average convergence divergence (MACD)
• Relative strength index (RSI)