Stock Analysis Introduction

Technical Analysis Tutorial

Stock analysis is a technique to measure the pulse of the stock and determine the right price to enter and exit stock with handsome return. There are two major yet very contrasting approach to do the same. They are:

1.Fundamental Analysis

Fundamental Analysis is a study based on company financial past results including sales, profit, operation, general economic forecast, expected demand, profit margin, sales forecast, debts, competition, management and many other parameters. Based on these studies, analyst tries to find right value (intrinsic value) of the stock. A buy or investment decision is taken and when stock is trading below right value and a sell decision is taken when the stock is much above its fair value.

Since the focus of the site is on technical analysis we will limit our scope on fundamental analysis to this level only. Definition from Wikipedia "Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets."
http://en.wikipedia.org/wiki/Fundamental_analysis

2.Technical Analysis

Technical analysis on the other hand do not believe in the finding intrinsic value of the stock. They rather study equity's price and volume movement to predict the future direction of the stock price. Technical analysis in a very simple definition is, study of charts to determine patterns and use them to trade when such patterns has very high probability of a stock movement in a certain direction.

Both these analysis uses very different ways to analyze stocks and have been quite effective in producing good results. Both these approach may not always give buy/sell signal at the same time and may even give strong and opposite signal on same stock. One study may indicate strong buy where as other may give strong sell. Beginners may get confused and are strongly advise to study both but follow one, as mixing them could produce undesired results.

Best of both world: Fundamental analyst look to buy a stock when it is at attractive price (below fair value) and when technical indicators also support the call.

For Example: Based on fundamentals, the stock is over priced and it suggests exit of the stock. But, upward trend in the stock is very strong in such case it makes sense to hold the stock till strength of the trend weakens and thereby maximizing the profit.

Similarly, when undervalued stock is in downtrend then it makes sense to wait for a lower level than buying the stock at that price.

Caution: Trading with any analysis be it technical or fundamental analysis involves a lot of risk.