Investing terminologies 101: Fundamental and Technical Analysis

 source: http://www.babypips.com

 

I know you don't want to hear this gibberish words because as we Pinoys say it "dudugo ang ilong" (my nose will bleed) and you end up in the mental hospital because you will loose your sanity once you read and try to understand this words. But if you are really serious in investing this is a must and I insist that you start reading the business column of the newspaper instead of the horoscope section.

One thing more lest get the definitions of this two words from Wikipedia.org:

Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis.Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts.

Technical analysis is a security analysis discipline for forecasting the future direction of prices through the study of past market data, primarily price and volume.

I think the description from Wikipedia is enough to explain these two words but let me further explain.

When buying how do you determine the price of a product? Isn't it that you either refer to the old price you know or you might do what we call canvassing right? It is the same with the stock market. You need information to determine the right price for the stock you are buying. With these information of course one should analyze so that a final prize could be pegged to such stock you are buying. In the Philippine Stock Exchange the rule is to not to be 3 level higher or lower from the last traded price based on the Board lot and fluctuation schedule. 

Fundamental analysis primarily gives you the idea what the stock's value based on the historical record which we call Financial Statement. You get to see the Assets(properties) and Liabilities(debts) of the company by looking at there Balance sheets or Statement of Position. It also shows distribution of ownership of the company in its Stockholders Equity. With these information one can analyze the valuations such as Liquidity(capacity to pay current debts), Working Capital(capacity to operate the business) and some other else.( I told you you might say "dumudugo na ang ilong ko Louis").

Another report usually called Profit & Loss report or Statement of Performance shows the companies results of operation on a particular period. This report will give you a picture of where does the company sell or earn, what expenses are spend to operate, and how much earnings did the company make. 

These information help you determine if it is wise to invest in the stock because it shows the viability of the company to earn in the near future and thus reward you with dividends(that's what we get when the board of directors are generous enough to share some profit of the company in other words its ka-ching!)

Now technical analysis on the other hand is more of a forecasting analysis. Let say its as if you are reading the horoscope of your chosen stock to invest into. These is where the word TREND comes. Data use in these analysis are the prices and trade volume of the stock. These analysis indicate the likelihood of the stock going up or going down. Usually it makes use of charts to visualize the possible outcome of the stock price. It shows when did investors and speculators bought a lot and at what price. An uptrend does not usually indicate that the stock's value is going up. It might be a result of speculators hoping to make a short gain due to some news or other market forces that is happening in the world(observe the current Greece debt crisis and debt releif and the recent Philippine election in which Noynoy was the leading presidential candidate)

Technical analysis gives you an idea when the stock price may rise or fall. With that knowledge you will be able to plan when to buy good stocks(buy stocks with good fundamental analysis when prices are down) and sell(when the price of the stock is near or above your target price or if the price surpass your breakeven price per stock). You only gain when you have sold your stock above your total acquisition cost(that is the price you bought that stock plus cost to by it like brokers commission, SCCP charges, Stock transaction tax, etc.)

Now tell me are these two words not worth knowing? If you do or you don't leave a comment and let us talk about it.