Today investing in financial securities such as shares, debentures, bonds, and other financial securities are considered to be the most profitable investment avenues when compare to other type of investments. However, these financial securities not only ensures higher return but also bears higher risk. Therefore, the combination of these two characteristics in the financial securities has created a challenging task for the investors. Hence with an object of getting success in the investment activity, the investors tries to predict the future behavior of the stocks by using some of the techniques among them the important are:
A. Fundamental analysis
Fundamental analysis is one of the important techniques, which is used to study the future behavior of the stocks. It actually refers to analyses of present and future earning capacity of the stocks based on the analysis of economy, industry and company as a whole there by to determine the intrinsic values of the stocks.
In other words, fundamental analysis is mainly concerned with the determination of intrinsic value of the stocks by analyzing the fundamental factors of economy, industry and company as a whole. The intrinsic value of the stocks represents the real worth or economic value, which is used by the fundamental analysts to identify the under priced and overpriced securities in the market. It means, if the intrinsic value of the stock is more than the market value, it considered as under priced and included in the portfolio. On the other hand, if the intrinsic value of a stock is less then the market value then it is considered as overpriced and excluded from the portfolio.
Thus, fundamental analysis is mainly concerned with the determination of intrinsic value of stocks and based on that intrinsic value investment decisions are taken by the fundamental analysts.
B. Technical analysis
It is another important technique, which is used to predict the future performance of the stocks. It is mainly concerned with the study of historical price movements of the stocks and on its volume of trade in the market to predict the future trend movements of the stocks. However, it does not consider any fundamental factors of the company like earnings, dividends, growth rates etc.
It means, technical analysts first predicts the future trend movements of the stocks by using historical data and then take buy decision if trend movement shows upward direction and sell decision if trend movement shows downward direction.
In other words, technical analysis does not involve in determination of any intrinsic value of the stocks instead it studies the past price movements, volume and other chart patterns to predict the future performance of the stocks.
Historical stock prices, volume of trade in the market, Charts, graphs etc, are the important inputs, which are required to perform technical analysis. Charting is the key activity in technical analysis and in fact there is no technical analysis with out charts.
Thus technical analysis mainly concentrates on the study of historical price movements and on its volume to identity future trend movements and based on this trend movements investment decisions are taken by technical analysts.
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