Investing excites you? Do you believe it is a great source of passive income? Then it is high time you become well-versed with the nitty and gritty details of investing and how the stock market works. There have been practices and strategies being followed by experts in the field for ages. Still, technology has brought about a drastic change in the way the market is interpreted and analyzed. Stock market analysis is the method of identifying previous trends and price movements to predict the future of trade performance. There is a technical and fundamental approach to doing this. Let us understand them in detail.
- Fundamental analysis: It considers several factors related to the prevailing market conditions, such as the current market value, industry trends, the state of the economy, etc. The goal behind this analysis is to determine if the stock is undervalued or overpriced and if it has the potential to grow shortly, and the factors taken into consideration are mainly:
- Financial statements
- Annual Revenues
- Industry trends
- Management strategies
- Economic indicators
This strategy has been adopted by investors for a long time and has helped them make informed financial decisions on stock trading. However, it has a few things that could be improved; it ignores the numerical pattern and cyclical behavior of investors.
- Technical analysis: Previous patterns of price movements and historical data form the basis of technical analysis as it helps analysts like professional investors and investment bankers identify the trends and make predictions accordingly. It is used to predict the performance of Forex trades and commodities like fossil fuels, minerals, agriculture goods, etc.
It is non-productive for IPOs because there is no availability of historical data to make assumptions, and the shortcoming associated with this type of analysis is that it always considers; the share market reflects overall macroeconomic changes, and trends may only be true in some cases.
What are the core principles of technical analysis?
At face value, technical analysis is pretty simple, select stocks and research their previous patterns of price movements to check if it is a good option for investment, certain tenets from the famous “Dow Theory” form the basis of technical analysis, and they are:
- Analyzing a stock based on its financial standing is futile because the market price already considers those factors, and the security price is inherently reflective of the existing market conditions.
- Sometimes, the price movement parameters follow a specific pattern; they go upwards, downwards, and horizontally as well.
- Investors are consistent with their approach; this is why the historical moves made by the investors keep repeating time and again. Repeating habits of these investors create a pattern and allow the technical analysis to show productive outcomes.
A stock chart is a collection of key aspects of technical stock analysis; they mainly include market price, open high/low, closing high/low, and 52-week high/low. Nowadays, stock trading and investment apps have miscellaneous options to try hands in different forms of investment in the share market. They also allow investors to browse the stock charts online, helping them choose a specific time frame to look for analyzing the stocks, which may be three months, six months, or a year old. Integrating technology into the conventional mode of investing is a game changer for novice and professional investors.