We have seen that, the Indian share market is quite sensitive and volatile, making it lucrative if you time it right! But, who has ever timed it right? No one in any corner of the world can say they figured out the stock market in the correct direction as it is depending on so many factors with in the country and around the world.

So, what can one get?

Perhaps, just a logical explanation of what could happen next. Depending upon your investment horizon, you could be hopeful that your investments work out in the long run or the short run.

When you are looking to invest in the longer run, you do fundamental analysis. However, for those who are into trading, be it intraday or within a couple of days, you are looking at more technical analysis.

Meaning & Definition

Fundamental Analysis

Fundamental analysis evaluates stocks by attempting to measure their intrinsic value. Fundamental analysts study everything from the overall economy and industry conditions to the financial strength and management of individual companies. Earnings, expenses, assets, and liabilities all come under scrutiny by fundamental analysts.

The below picture shows how Fundamental analysis operates in stock buying process.

The Fundamental Analysis assesses all the factors that have the capability of influencing the value of the security (including macroeconomic factors and organization-specific factors), called as fundamentals, which are nothing but the financial statements, management, competition, business concept, etc. It aims at analyzing the economy as a whole, the industry to which it belongs, business environment and the firm itself.

Technical Analysis

Technical analysis differs from fundamental analysis, in that traders attempt to identify opportunities by looking at statistical trends, such as movements in a stock's price and volume. The core assumption is that all known fundamentals are factored into price, thus there is no need to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic value. Instead, they use stock charts to identify patterns and trends that suggest what a stock will do in the future.

The below picture shows how Technical analysis operates in stock buying process.

The price at which the buyer and seller of the share, decides to settle the deal, is one such value which combines, weighs and expresses all the factors, and is the only value which matters. In other words, technical analysis gives you a clear and comprehensive view of the reason for changes in prices of a security. It is based on the premise that the price of share move in trends, i.e. upward or downward, relying upon the attitude, psychology and emotion of the traders.

Both methods are used for evaluating the stock and prediction of future stock prices. Still, while fundamental analysis focuses on the intrinsic value of the stock, technical analysis focuses on the past trend of the price movement of stock.

How to Do Fundamental Analysis of a Stock?

Here are some necessary steps to start a fundamental analysis of a company

Understand the company, its operations, business model, etc.

Use the financial ratios for initial screening.

Closely study the financial reports of the company.

Find the company’s competitors/rivals and study them.

Check the company’s debt and compare it with rivals.

Analyze the company’s prospects.

Tools of Technical Analysis

Charts

Volume charts are one of the most widely used technical analysis tools that show the number of shares bought and sold in the market during a day. You can either use a bar chart or candlestick chart for tech analysis. Used in tandem with trendlines, charts facilitate this exercise to a great extent.

Momentum Indicators

They are statistical figures calculated based on stocks’ price and volume data. During technical analysis, momentum indicators act as supporting tools to charts. One of the objectives of technical analysis is to confirm your views about a stock and momentum indicators help you do it with ease.

Moving Averages

Another technical analysis tool, with moving averages you can eliminate sharp and frequent fluctuations in a stock chart. Note that sometimes there could be sharp movement in stock prices within a short period. This makes it difficult to predict the trend. Moving averages help remove its impact and make the trend more prominent.

Finally, we can conclude that, in the future it is likely that the various forms of analysis will increasingly be combined. The field of quantitative investing has rapidly gained recognition in the asset management industry due to its more scientific approach. Technology now allows fundamental, technical and quantitative analysis to be effectively combined, and tested. Increasingly, behavioral finance and market sentiment are being incorporated in algorithmic trading strategies. And, new technologies like artificial intelligence and big data can also enhance all three forms of analysis.