An individual being part of the stock market would indirectly mean being part of great research in-depth.
No one can time the stock markets because they are highly unpredictable.
Only experienced people tend to understand the secrets and trends.
But do you know that’s not limited to the so-called ‘experienced’ people!
With the right knowledge and methods to analyse the market over time, one can still have a better understanding of the market trends and his investment portfolio.
This requires an eagle eye view along with consistency and market awareness.
Nowadays, various methodologies of stock market research help you understand the various ways there are of analyzing the movements of the market and the methods used by experts to predict the movement of the markets.
These are specific scientific methods of predicting the stock market movement, based on various factors such as past price movements, financial stability of the company, economy and the industry, candlestick patterns etc.
Among these methodologies, the most commonly used methods of predicting future movements of stocks are technical analysis and fundamental analysis.
Each method has different factors affecting it, different tools used and also have different applications.
In the previous blog article, we got an understanding of quantitative analysis!
This blog article let us understand more about technical, fundamental and also quantitative analysis in a comparative manner of the stock market.
1. Fundamental Analysis of stock markets
Fundamental analysis is the study of a company’s stock prices in relation to the factors affecting the organization such as its financials, revenue sources, its expenses, profitability etc.
Fundamental analysis was the only way to analyse stock prices at one point when trading stocks was a physical activity.
Fundamental analysis of the stock markets is often done with a long-term view and to predict the general movement of the stock prices in a long term.
There are three steps to be followed while doing fundamental research on any stock.
Steps and approaches of fundamental analysis
These three steps are:
- Analysing the company
- Analysing the industry
- Analysing the economy.
These three steps can be followed in two ways- either a top-down approach or a bottom-up approach.
The main objective of doing fundamental analysis is to assess the ‘fair value’ of a company’s shares and then to evaluate whether the share prices are overvalued or undervalued.
Fundamental analysis believes that the share prices of any company always gravitate towards its fair value.
Hence, if the shares are overbought, the fundamental analysis would suggest that it is a time to sell the shares and similarly if the shares are oversold, and the share prices are considerably below their fair value, then fundamental analysis says that the share prices will recover and an uptrend is possible.
2. Technical Analysis
Technical analysis is the method of analysing stock prices on the basis of statistical data such as past price movements, volume, moving averages, chart patterns etc.
Technical analysts believe that history repeats itself and they aim to identify such patterns on the charts which have occurred in the past and have always led the shares upward or downward.
While fundamental analysis lays stress on the fair value of the stock and assesses how near or how far the stock is from its fair value, the purpose of technical analysis is to ascertain in which direction will the stock prices move next.
When is Technical analysis used?
Technical analysis is generally used for giving a relatively short-term outlook for traders.
This is used for intraday trades, swing trades and short-term trades, based on the candlestick patterns formed on the price charts.
Candlestick patterns form an extremely important part of technical analysis.
A candlestick is a way of depicting the price movement for a fixed time duration.
A candle can be formed for a time period of five minutes, 15 minutes, one hour, one day etc. and a series of consecutive candlestick patterns can be used to predict the future direction of the stock.
Candlestick patterns along with other indicators such as moving averages and volume data are used in technical analysis for predicting stock price movements.
3. Quantitative Analysis
This third form of analysis uses a mathematical formula to predict the price movement of stocks based on a set of conditions, which when satisfied through the formula, give the analyst a signal of buy/ sell or hold.
Quantitative analysis uses historic data to validate its formula.
And then recommends whether the prices of stocks will go up or go down.
Quantitative Analysis uses human intelligence only to strategize this mathematical formula and once this formula is tested, it can be used without any human intervention.
Quantitative analysis uses algorithms to run through stock prices and in which the stock prices fulfil the present conditions mentioned in the formula, a recommendation is triggered.
Since a lot of aspects associated with the formula can be managed by the analyst, hence, the algorithm of quantitative analysis can be tweaked to generate recommendations of any time frame- intraday, swing trades short term, long term etc.
Each of the stock market analysis methods has its own pros and cons.
But choosing only one type of analysis and discarding the other two might not be reasonable.
Among the three types of analysis, quantitative analysis is the most recent methodology introduced and there are quite many drawbacks of it that are yet to be resolved.
Hence, quantitative analysis is often used in combination with some other form of analysis.
However, it is also true that different forms of analysis ad market research might generate different types of recommendations.
For example, in the case of a stock XYZ, fundamental analysis may suggest a potential upswing in the prices, whereas technical analysis may suggest a potential downturn.
In such cases, it is necessary to understand which form of analysis holds more merit and is more dependable in such circumstances.
A certified stock market advisor can help you understand this and help you become a more aware and educated trader.