The subject of investing into the stock markets has always garnered varied arguments. However, doing it professionally always beats the rest. This would mean assessing the available avenues and selecting the one that best suits the investor.
A professional mode of investing offers two approaches -
Fundamental Analysis, and
Let us understand fundamental analysis. In a broad sense, studying the fundamentals involves a detailed study of a company’s financial statements – the Balance Sheet and Profit and Loss statements and its ratios. These are part of financial analysis. I believe one needs a certain degree of financial literacy to understand them. Also, fundamental analysis is much beyond studying these. One also needs to consider the company’s management, the sector it operates within, its corporate actions, global markets, competitors, oil and dollar prices, government policies, interest rates and geopolitical situations. There are a bunch of variables that affect a company.
To analyse a company one needs to know the complete picture. Data collection and analyses is a time consuming process. Assuming that one receives all the above information on a piece of paper in a ready-to-use format, what could one do with it? Analyse it, of course; you would say. But to analyse this data one needs to have the right skill set, a graduate degree in finance at the minimum. Add to this, some amount of experience in the field to analyse the data correctly.
Obsolescence is another aspect here. Data and skills aside, by the time a layman successfully deciphers the studies, the data changes. This is because the time taken to gather and analyse the data is painfully long. A few variables such as currency rates or interest rates – are bound to undergo rapid fluctuations.
Considering the above, the efficacy of fundamental analysis for laymen is very low.
From out of the whole bunch of these variables, a few people are in the know-how of and are analysing a part of this data whereas a few of them look at the other part. Everybody ends up knowing something about the company but there is nobody who knows everything about it.
Nevertheless, everybody trades the company’s stock on the same platform at the same price and collectively agree on something called the Price.
These variables are the Causes because they are the reason why the company functions and because the company functions, there is a price. Fundamental analysis is therefore a Cause and the resulting price is the Effect.
What you study in technical analysis is the price. Hence fundamental analysis is the Cause and technical analysis is the Effect.
Causes may be numerous but the effect is singular. While studying the causes, there is a possibility that one may either miss or misinterpret a couple of them. But price is singular. Study of price is what technical analysis is all about.
This is why technical analysis is called the study of Price. Price is derived by traders and investors all over the world trading on the same platform. Studying price is akin to the backdoor study of fundamentals.
Fundamental analysis is the cause whereas technical analysis is the effect.
Causes may be numerous but there is only one effect.
The lowest time frame of the variables to be studied under fundamental analysis may be quarterly or monthly (considering how often the companies publish their statements). The time frame in technical studies could go down to low as a one-minute chart.
Fundamental studies therefore offer a longer term view of the company’s price movements. Whereas technical studies could be used to forecast long as well as short term movements.
Studying fundamental tends to get subjective, due to manner in which the data is deciphered. Whereas price charts are a definite structure – be it bullish or bearish and buy or sell.
Technical studies are comprehensive. One may use them independently to trade as well as invest successfully. Fundamental studies tend to ignore the risk aspect. The elaborate documents and reports on which the studies are based most often do not address the risk involved in an investment. Risk is one of the most vital factor while trading and investing in the marketplace.
To conclude, a combination of both these approaches would be a great. For someone who is well-versed with interpreting financial statements, fundamental studies would provide an edge whereas technical studies would be a great approach for the rest.
No matter what approach you adopt, the right way to invest would be to do it professionally by learning the method yourself rather than being dependent upon non-reliable sources.
The author is Co-founder of Malkansview Training Institute Private Limited.