How would we know what is the best share to pick? The answer would be another question - Do you intend to make money immediately or you plan an investment? Most things in capital markets are quite simple rather than taking this obnoxious decision. This is where our financial strategy comes handy.
Basically we need to look at 2 things before buying a stock -
- How good the company is?
- How good the stock is?
When you analyze the goodness of a company its called as Fundamental Analysis, our focus would be long term investment and not quick bucks earnings. When we critique the CMP (current market price) of the stock its called Technical Analysis, our focus would be immediate return on investment due to fluctuation in CMP.
Lets try to simplify the fundamental and technical analysis so that amateurs like us can also start participating in capital markets. The best thing I would say is to form the strategy (long term or short term) after realizing the difference between fundamental and technical analysis.
Fundamental Analysis (FA) - Study of the factors that make or break a company's good run. FA are derived from the firm's Y-O-Y or Q-O-Q results. The main things we look here are
- Turnover - The gross output/sales generated by the firm. The turnover should be showing a growth trend.
- Operating Profit Percentage - This is the ratio of the gross profit to the turnover. The OPP should be growing.
- Earnings Per Share (EPS) - The ratio of profit to the total number of shares. This gives the value of what profits the firm was able to generate per each share held.
- Price Earnings (P/E) - This is the ratio of CMP to the EPS. This also indicates how well the company is placed among its peers. Higher P/E means the company is on a good growth track and enjoys a good share of the business among its peers.
Most of these ratios or numbers would indicate how strong the company is. All these numbers are quite important to assess the quality of the company. Normally a good running company continues to run good unless spoiled by non-existent influences.
Technical Analysis (TA) - TA on the other hand gives a quite strong indication on how well placed the price of a stock is, what are its immediate trends like and whether you would like to BUY/SHORT it immediately. It mostly deals with the momentum of the stock and whether the trend is bullish/bearish
Few things that make up the TA are.
- Resistance and Support Index - Resistance is the upper oscillating point of share price which if not broken would not allow to share to sustain the bullish trend. Support would be lower oscillating point which sustains the share price not falling into a bearish trend.
- Moving Averages - This over a period say 5, 20, 50, 100, 200 etc that shows the price of the share. The share normally sticks with its price on these periods. If it shows a deviation, it indicates a trend would have emerged.
There are lot of momentum indicators as well that complement the TA. This could predict whether the trend is continual or reversing.
Now we would have got a basic insight into the FA and TA. The next best thing to do is to create your strategy and then select the analysis method. Use it to your advantage and maximize your returns
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