Instead of posting just technical analysis , i Had decided add posting of Fundamental Analysis (FA) into my blog.
Introduction
Generally , People who trade stocks are generally divided into 2 school of thoughts
- People whom used Technical Analysis (TA) to decide entry and exit price.
TA have the following 3 assumptions:
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Efficient-market hypothesis (EMH) stated that everything
relevant to the value of a company's stock is discounted and reflected in share price.
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Trends sometimes appear in share price moves and when once
started, these trends tend to continue.
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History in the market repeats itself. Majority of these TA indicators are statistically inclined.
These people usually trade shorter term , weeks , days and even by minutes with the help of technology. Names given to this school of thoughts are speculators, day-traders , swing traders and even gamblers.
Examples of TA indicators: Moving Average (simple and expotential),stochastic,macd , RSI and drawing trendlines etc... - People whom used Fundamental Analysis (FA) , irregardless of from a bottom-up or top-down approach, read balance sheet, cash flow statement and income statement in financial statements to analyze it to see if that firm is undervalue.
If it is undervalue , the investor will see it as a bargin and buy it and wait the price to go up to a price they seems it to be fair valued or over valued before selling it.
The person whom is famous in doing this is Warren Buffett.
Examples of FA analysis: Price to Earning Ratio , Price to Sales Ratio , Price to Book Value, Price to FCFE , Dividend Yield , reading into revenue , gross profit and net profit etc...
Why are they divided into these 2 schools ?? We shall look at the pros and cons of both of them.
TA Vs FA
TA:
- It is less time consuming as compared to FA.
- Stocks will never be undervalue due to EMH.
- TA only relied only in charts and indicators , whom investors see it as gambling . They dont even need to care to know what business it is in , do they have cash flow problem and whether they are going bankrupt tomorrow.
FA:
- There is a systematic approach in doing FA and is more logical than TA which relies only in charts and indicators.
- Doing FA will require the analyst to understand the company more and therefore will have more confident after investing.
- There might be chance that the numbers in the annual reports are being manipulated. Window Dressing is another term and is widely used by companies to beef up their quarterly / annual reports. Therefore when this happened , there is no point doing FAs.
- Doing FA will need the analyst to forward look the company and project their revenue , growth and profit etc... This is very difficult to project and will lead to inaccurate valuation of a company.
So....Have you identify which class are you in ??? For me....
I am a hybrid of them.... FA will always come first... Usually i will take keep a look out for fundmentally sound companies , which is usually in STI and MSCI SG. When their price drop....i will do TA to decide the entry , exit and cut loss price.... Usually i will only go long as i dont like to chase stock even if i missed the chance . I would rather wait for it to retrace before buying
