Fundamental Analysis vs. Technical Analysis

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Melinda Shepherd
6 years ago
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divided, P/E ratio (price-to-earnings ratio), PEG ratio, debt-to-equity ratio, etc.

1 Fundamental Analysis vs. Technical Analysis Fundamental analysis involves analyzing financial statements, management, competitive advantages, state of the economy, interest rates, earnings forecast, credit risk, cash flow, divided, P/E ratio (price-to-earnings ratio), PEG ratio, debt-to-equity ratio, etc. Based on fundamental analysis, investors can determine whether it is a value stock, a growth stock, or a stock that you should stay away from. Top-down and bottom-up analysis and investing styles. Technical Analysis maintains that all information is already reflected in the stock price. Trends are your friend. The technical analyst does not care what the value of a stock is. Stock prices trend directionally, i.e., up, down, or sideways. The basic definition of a price trend was originally put forward by the Dow Theory. Practical Personal Investing, Fundamental vs Technical, presented by Greg Shtock 1

For example, in 2012 the stock price of Barrick Gold lost about 30%, which is equivalent to 7 years of its dividend.

2 Investors make money by: 1. Collecting interest and/or dividend 2. Benefitting from stock/security price appreciation Typical yield on fixed income today is 1 5% a year. Typical stock /fund prices move 1 5% a week. For example, in 2012 the stock price of Barrick Gold lost about 30%, which is equivalent to 7 years of its dividend. The Boeing stock price appreciated about 7% which is equivalent to 3 years of its dividend. Is price movement important? If so, what drives the price? Fear, Greed,and what else? Practical Personal Investing, Fundamental vs Technical, presented by Greg Shtock 2

There are three main factors that move a stock s price up or down. Company Fundamentals (20%): Product, management, company balance sheet, revenues, earnings growth, dividend, etc.

3 There are three main factors that move a stock s price up or down. Company Fundamentals (20%): Product, management, company balance sheet, revenues, earnings growth, dividend, etc. Sector Changes (30%): A sector may catch on fire or may fall out of favor. Companies that have solid or poor fundamentals are both pulled along with the rest of the sector. Think about the gold and commodities sectors today. Market Swings (50%): A rising market pushes stock price up. A market correction or a crash pulls the stock price down. Think about dot com era most stocks moved up regardless of their fundamentals. In the downturns of 1929, 1987, and 2008 most stocks moved down regardless of their fundamentals. It is too complicated to analyze ALL the factors that affect the stock price. We need effective tools to help us study the overall effect of various factors. Technical Analysis is a powerful visual tool that helps us to analyze stock price movement. But It is NOT an investor s Holy Grail or a crystal ball. It does NOT predict future prices or market moves. Practical Personal Investing, Fundamental vs Technical, presented by Greg Shtock 3

For example, a chart may show a stock's price movement over a one-year period, where each point on the graph

4 Charts In technical analysis, charts are similar to the charts that you see in any business environment. A chart is simply a graphical representation of a series of prices over a set time frame. For example, a chart may show a stock's price movement over a one-year period, where each point on the graph represents the closing price for each day the stock is traded. Practical Personal Investing, Fundamental vs Technical, presented by Greg Shtock 4

5 Trends Practical Personal Investing, Fundamental vs Technical, presented by Greg Shtock 5

6 Chart Patterns Practical Personal Investing, Fundamental vs Technical, presented by Greg Shtock 6

7 Candlestick Charts Developed in the 18th century by Munehisa Homma, Japanese rice trader. Tug-of-war between buyers and sellers Practical Personal Investing, Fundamental vs Technical, presented by Greg Shtock 7

8 Where to get additional information: Book: Technical Analysis of the Financial Markets, John J. Murphy Free charting web sites you can use: Paid charting services that I use: TC2000 from Worden Brothers: esignal: In addition to charting, you scan to find stocks that are in uptrend/downtrend, sector strength, create and maintain watch lists, create unique criteria to find new ideas and to monitor portfolio performance in real time. In addition, you can set alerts based on the price or any other technical indicator. The program will also send you an as soon as the price or indicator meets your criteria. It is an essential part of managing the Risk in your investment. Practical Personal Investing, Fundamental vs Technical, presented by Greg Shtock 8

9 To download or read this presentation, go to our website Practical Personal Investing, Fundamental vs Technical, presented by Greg Shtock 9

Knowing When to Buy or Sell a Stock

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