05 October 2010

Stock Investment: The difference between Fundamental Analysis and Technical Analysis

Generally, investors can be classified into three category.
1. Based on fundamental analysis
2. Based on technical analysis
3. Combination of both technical analysis and fundamental analysis
(note: gambling is not included)

Firstly, we should know why undervalued company is considered "cheap". This is because its market price has not reached its intrinsic value.

So, what is a company intrinsic value?
Intrinsic value is a value which come out from a fundamental analysis. Fundamental analysis includes a combination analysis toward the prospect of company, the directors ability, net asset value, ROE, ROA, current ratio etc. With these analysis value, fundamental analysis investors will come out an idea about the intrinsic value of the company. In other words, fundamental analysis investors will never look at "cheap" stock only (low PE). It is just one of the criteria.

Technical analysis, on the other hand, are based on human behavior to predict the trend of stock price. Human behavior can be predicted based on the volume and sell or buy force of a specific stock within certain period of time. One should bear in mind that there are some assumptions for technical analysis, if the assumptions do not be fulled suddenly, investors should change another technical analysis system. In other words, there are lots of technical analysis methods in the market.

However, it is a good idea to combine both fundamental analysis and technical analysis in stock market investment. In short, this strategy is using fundamental analysis to find a good company first, and then, using technical analysis to predict the market price trend.

Again, investment is an art. Art is hardly described by words. That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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