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UNIVERSITY OF MUMBAI (FIFTH SEMESTER) T.Y.B.F.

M A PROJECT ON: FUNDAMENTAL AND TECHNICAL ANALYSIS ON STOCK MARKET ACADEMIC YEAR: 2013-201 SUBMITED BY: ARJUN SHYAMLAL !UPTA PROJECT !UIDE: PROF. !ANESH SHINDE DATE OF SUBMISSION: 1"TH S#$%#&'#() 2013 MALINI KISHOR SAN!HVI COLLE!E OF COMMERCE AND ECONOMICS J.V.P.D SCHEME VILE PARLE (*EST) MUMBAI + 00 0 ,

DECLARATION

I ARJUN SHYAMLAL !UPTA of MALINI KISHOR SAN!HVI COLLE!E OF COMMERCE AND ECONOMICS, of T.Y.B.F.M. (Semester V) declare that I have completed this project on the -FUNDAMENTAL AND TECHNICAL ANALYSIS ON STOCK MARKET. in the academic year 2013 + 201 . The information s !mitted is tr e and ori"inal to the !est of my #no$led"e.

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CERTIFICATE

This is to certify that ARJUN SHYAMLAL !UPTA of MALINI KISHOR SAN!HVI COLLE!E OF COMMERCE AND ECONOMICS, of T.Y.B.F.M. (Semester V) has completed the project on the -FUNDAMENTAL AND TECHNICAL ANALYSIS ON STOCK MARKET., in the academic year 2013 + 201 . The information s !mitted is tr e and ori"inal to the !est of my #no$led"e.

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ACKNO*LED!EMENT
It has al$ays !een my sincere desire as a mana"ement st dent to "et an opport nity to e6press my vie$s, s#ills, attit de and talent in $hich I am proficient. & project is one s ch aven e thro "h $hich a st dent $ho aspires to !e a f t re mana"er does somethin" creative. This project has "iven me the chance to "et in to ch $ith the practical aspects of mana"ement. I am e6tremely "ratef l to the )niversity of M m!ai for havin" prescri!ed this project $or# to me as a part of the academic re7 irement in the Bachelor of 2ommerce (Financial Mar#ets) co rse. I $ish to appreciate the mana"ement and staff of Malini 3ishor San"hvi 2olle"e, BFM for providin" the entire state of the art infrastr ct re and reso rces to ena!le the completion and enrichment of my project. I $ish to e6tend a special than#s to my project + ide 0rof. !ANESH SHINDE $itho t $hose " idance, the project may not have ta#en shape.

TABLE OF CONTENTS
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8. 9. :. ;. <. =. >. ?. I*T,(%)2TI(* F)*%&M'*T&/ &*&/YSIS T'2.*I2&/ &*&/YSIS .IST(,Y F)*%&M'*T&/ &*&/YSIS VS T'2.*I2&/ &*&/YSIS IM0(,T&*T '/'M'*T (F F)*%&M'*T&/ &*&/YSIS 2(*2'0T (F F)*%&M'*T&/ &*&/YSIS (F ST(23 M&,3'T B&SI2 F)*%&M'*T&/ &*&/YSIS F(, B'+I*'', I* ST(23 M&,3'T @. T'2.*I2&/ &*&/YSIS B&S'% S.&,' T,&%I*+ TI0S F(, ST(23 M&,3'T %IFF','*2' B'TB''* F)*%&M'*T&/ &*% T'2.*I2&/ &*&/YSIS 88. 89. 8:. 8;. T'2.*I2&/ VS. F)*%&M'*T&/ ST(23 T,&%I*+ F)*%&M'*T&/ (, T'2.*I2&/ &*&/YSIS I* %&Y T,&%I*+ 2(*2/)SI(* BIB/I(+,&0.Y

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8. I*T,(%)2TI(* 9. F)*%&M'*T&/ &*&/YSIS :. T'2.*I2&/ &*&/YSIS ;. .IST(,Y <. F)*%&M'*T&/ &*&/YSIS VS T'2.*I2&/ &*&/YSIS =. IM0(,T&*T '/'M'*T (F F)*%&M'*T&/ &*&/YSIS >. 2(*2'0T (F F)*%&M'*T&/ &*&/YSIS (F ST(23 M&,3'T 4. BASIC FUNDAMENTAL ANALYSIS FOR BE!INEER IN STOCK MARKET @. T'2.*I2&/ &*&/YSIS B&S'% S.&,' T,&%I*+ TI0S F(, ST(23 M&,3'T 8A.%IFF','*2' B'TB''* F)*%&M'*T&/ &*% T'2.*I2&/ &*&/YSIS 88.T'2.*I2&/ VS. F)*%&M'*T&/ ST(23 T,&%I*+
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1. INTRODUCTION
F ndamental analysis is the e6amination of the nderlyin" forces that affect the $ell !ein" of the economy, ind stry "ro ps, and companies. &s $ith most analysis, the "oal is to derive a forecast and profit from f t re price movements. &t the company level, f ndamental analysis may involve e6amination of financial data, mana"ement, ! siness concept and competition. &t the ind stry level, there mi"ht !e an e6amination of s pply and demand forces for the prod cts offered. For the national economy, f ndamental analysis mi"ht foc s on economic data to assess the present and f t re "ro$th of the economy. To forecast f t re stoc# prices, f ndamental analysis com!ines economic, ind stry, and company analysis to derive a stoc#Cs c rrent fair val e and forecast f t re val e. If fair val e is not e7 al to the c rrent stoc# price, f ndamental analysts !elieve that the stoc# is either over or nder val ed and the mar#et price $ill ltimately "ravitate to$ards fair val e. F ndamentalists do not heed the advice of the random $al#ers and !elieve that mar#ets are $ea#4form efficient. By !elievin" that prices do not acc rately reflect all availa!le information, f ndamental analysts loo# to capitaliDe on perceived price discrepancies. Technical &nalysis is one of the most si"nificant tools availa!le for forecastin" financial mar#et !ehavio r. It has !een proven to !e an effective tool for investors and is constantly !ecomin" more accepted !y mar#et participants. Bhen sed in

conj nction $ith f ndamental analysis, technical analysis can offer a more complete val ation, $hich can ma#e the difference in e6ec tin" profita!le trades. Technical analysis can !ecome a self f lfillin" prophecy. Bhen many investors, sin" similar tools and follo$in" the same concepts, shift to"ether the s pply and demand, this can lead to the prices movin" in the predicted direction. Technical analysis is a techni7 e sed to forecast the f t re direction of prices thro "h the st dy of historical mar#et data, primarily price, vol me and open interest. Technical traders se tradin" information (s ch as previo s prices and tradin" vol me) alon" $ith mathematical indicators to ma#e their tradin" decisions. This information is s ally displayed on a "raphical chart pdated in real time that is interpreted in order to determine $hen to ! y and $hen to sell a specific instr ment.

2. FUNDAMENTAL ANALYSIS AND TECHNICAL ANALYSIS


2.1 FUNDAMENTAL ANALYSIS F5672&#6%28 26289:0: of a ! siness involves analyDin" its financial statements and health, its mana"ement and competitive advanta"es, and its competitors and mar#ets. Bhen applied to f t res and fore6, it foc ses on the overall state of the economy, interest rates, prod ction, earnin"s, and mana"ement. Bhen analyDin" a stoc#, f t res contract, or c rrency sin" f ndamental analysis there are t$o !asic approaches one can seE !ottom p analysis and top do$n analysis.F8G The term is sed to distin" ish s ch analysis from other types of investment analysis, s ch as 7 antitative analysis and technical analysis. F ndamental analysis is performed on historical and present data, ! t $ith the "oal of ma#in" financial forecasts. There are several possi!le o!jectivesH

to cond ct a company stoc# val ation and predict its pro!a!le price evol tion, to ma#e a projection on its ! siness performance, to eval ate its mana"ement and ma#e internal ! siness decisions, to calc late its credit ris#.

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L/63-%#(& T(#67: F ndamental analysis is "ood for lon"4term investments !ased on very lon"4term trends. The a!ility to identify and predict lon"4term economic, demo"raphic, technolo"ical or cons mer trends can !enefit patient investors $ho pic# the ri"ht ind stry "ro ps or companies. V285# S$/%%063 So nd f ndamental analysis $ill help identify companies that represent a "ood val e. Some of the most le"endary investors thin# lon"4term and val e. +raham and %odd, Barren B ffett and -ohn *eff are seen as the champions of val e investin". F ndamental analysis can help ncover companies $ith val a!le assets, a stron" !alance sheet, sta!le earnin"s, and stayin" po$er. B5:06#:: A15&#6 (ne of the most o!vio s, ! t less tan"i!le, re$ards of f ndamental analysis is the development of a thoro "h nderstandin" of the ! siness. &fter s ch painsta#in" research and analysis, an investor $ill !e familiar $ith the #ey reven e and profit drivers !ehind a company. 'arnin"s and earnin"s e6pectations can !e potent

drivers of e7 ity prices. 'ven some technicians $ill a"ree to that. & "ood nderstandin" can help investors avoid companies that are prone to shortfalls and identify those that contin e to deliver. In addition to nderstandin" the ! siness, f ndamental analysis allo$s investors to develop an nderstandin" of the #ey val e drivers and companies $ithin an ind stry. & stoc#Cs price is heavily infl enced !y its ind stry "ro p. By st dyin" these "ro ps, investors can !etter position themselves to identify opport nities that are hi"h4ris# (tech), lo$4ris# ( tilities), "ro$th oriented (comp ter), val e driven (oil), non4cyclical (cons mer staples), cyclical (transportation) or income4oriented (hi"h yield). K6/=063 *;/>: *;/ Stoc#s move as a "ro p. By nderstandin" a companyCs ! siness, investors can !etter position themselves to cate"oriDe stoc#s $ithin their relevant ind stry "ro p. B siness can chan"e rapidly and $ith it the reven e mi6 of a company. This happened to many of the p re Internet retailers, $hich $ere not really Internet companies, ! t plain retailers. 3no$in" a companyCs ! siness and !ein" a!le to place it in a "ro p can ma#e a h "e difference in relative val ations.

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T0&# C/6:%(206%: F ndamental analysis may offer e6cellent insi"hts, ! t it can !e e6traordinarily time4cons min". Time4cons min" models often prod ce val ations that are contradictory to the c rrent price prevailin" on Ball Street. Bhen this happens, the analyst !asically claims that the $hole street has "ot it $ron". This is not to say that there are not mis nderstood companies o t there, ! t it is 7 ite !rash to imply that the mar#et price, and hence Ball Street, is $ron".

I675:%(9@C/&$269 S$#10<01 Val ation techni7 es vary dependin" on the ind stry "ro p and specifics of each company. For this reason, a different techni7 e and model is re7 ired for different ind stries and different companies. This can "et 7 ite time4cons min", $hich can limit the amo nt of research that can !e performed. & s !scription4!ased model may $or# "reat for an Internet Service 0rovider (IS0), ! t is not li#ely to !e the !est model to val e an oil company. S5'A#1%0B0%9 Fair val e is !ased on ass mptions. &ny chan"es to "ro$th or m ltiplier ass mptions can "reatly alter the ltimate val ation. F ndamental analysts are "enerally a$are of this and se sensitivity analysis to present a !ase4case val ation, an avera"e4case val ation and a $orst4case val ation. .o$ever, even on a $orst4 case val ation, most models are almost al$ays ! llish, the only 7 estion is ho$ m ch so. The chart !elo$ sho$s ho$ st !!ornly ! llish many f ndamental analysts can !e.

A6289:% B02: The majority of the information that "oes into the analysis comes from the company itself. 2ompanies employ investor relations mana"ers specifically to handle the analyst comm nity and release information. &s Mar# T$ain said, Ithere are lies, damn lies, and statistics.I Bhen it comes to massa"in" the data or spinnin" the anno ncement, 2F(s and investor relations mana"ers are professionals. (nly ! y4side analysts tend to vent re past the company statistics.

B y4side analysts $or# for m t al f nds and money mana"ers. They read the reports $ritten !y the sell4side analysts $ho $or# for the !i" !ro#ers (2IB2, Merrill /ynch, ,o!ertson Stephens, 2S First Boston, 0aine Be!er, %/- to name a fe$). These !ro#ers are also involved in nder$ritin" and investment !an#in" for the companies. 'ven tho "h there are restrictions in place to prevent a conflict of interest, !ro#ers have an on"oin" relationship $ith the company nder analysis. Bhen readin" these reports, it is important to ta#e into consideration any !iases a sell4side analyst may have. The ! y4side analyst, on the other hand, is analyDin" the company p rely from an investment standpoint for a portfolio mana"er. If there is a relationship $ith the company, it is s ally on different terms. In some cases this may !e as a lar"e shareholder. D#<060%0/6 /< F20( V285# Bhen mar#et val ations e6tend !eyond historical norms, there is press re to adj st "ro$th and m ltiplier ass mptions to compensate. If Ball Street val es a stoc# at <A times earnin"s and the c rrent ass mption is :A times, the analyst $o ld !e press red to revise this ass mption hi"her. There is an old Ball Street ada"eH the val e of any asset (stoc#) is only $hat someone is $illin" to pay for it (c rrent price). - st as stoc# prices fl ct ate, so too do "ro$th and m ltiplier ass mptions. &re $e to !elieve Ball Street and the stoc# price or the analyst and mar#et ass mptionsJ It sed to !e that free cash flo$ or earnin"s $ere sed $ith a m ltiplier to arrive at a fair val e. In 8@@@, the SK0 <AA typically sold for 9? times free cash flo$. .o$ever, !eca se so many companies $ere and are losin" money, it has !ecome pop lar to val e a ! siness as a m ltiple of its reven es. This $o ld seem to !e

(3, e6cept that the m ltiple $as hi"her than the 0' of many stoc#sL Some companies $ere considered !ar"ains at :A times reven es.

T=/ 26289%0128 &/7#8: Bhen the o!jective of the analysis is to determine $hat stoc# to ! y and at $hat price, there are t$o !asic methodolo"ies 8. F ndamental analysis maintains that mar#ets may misprice a sec rity in the short r n ! t that the IcorrectI price $ill event ally !e reached. 0rofits can !e made !y p rchasin" the mispriced sec rity and then $aitin" for the mar#et to reco"niDe its Imista#eI and reprice the sec rity.
2.

Technical analysis maintains that all information is reflected already in the stoc# price. Trends Care yo r friendC and sentiment chan"es predate and predict trend chan"es. InvestorsC emotional responses to price movements lead to reco"niDa!le price chart patterns. Technical analysis does not care $hat the Cval eC of a stoc# is. Their price predictions are only e6trapolations from historical price patterns.

Investors can se any or all of these different ! t some$hat complementary methods for stoc# pic#in". For e6ample many f ndamental investors se technicals for decidin" entry and e6it points. Many technical investors se f ndamentals to limit their niverse of possi!le stoc# to C"oodC companies. The choice of stoc# analysis is determined !y the investorCs !elief in the different paradi"ms for Iho$ the stoc# mar#et $or#sI. See the disc ssions at efficient4

mar#et hypothesis, random $al# hypothesis, capital asset pricin" model, Fed model Theory of '7 ity Val ation, mar#et4!ased val ation, and !ehavioral finance.

F ndamental analysis incl desH 8. 'conomic analysis 9. Ind stry analysis :. 2ompany analysis (n the !asis of these three analyses the intrinsic val e of the shares are determined. This is considered as the tr e val e of the share. If the intrinsic val e is hi"her than the mar#et price it is recommended to ! y the share . If it is e7 al to mar#et price hold the share and if it is less than the mar#et price sell the shares. U:# '9 70<<#(#6% $/(%</80/ :%98#: Investors may se f ndamental analysis $ithin different portfolio mana"ement styles.

B59 267 ;/87 investors !elieve that latchin" onto "ood ! sinesses allo$s the investorCs asset to "ro$ $ith the ! siness. F ndamental analysis lets them find C"oodC companies, so they lo$er their ris# and pro!a!ility of $ipe4 o t. Mana"ers may se f ndamental analysis to correctly val e C"oodC and C!adC companies. 'vent ally C!adC companiesC stoc# "oes p and do$n, creatin" opport nities for profits.

Mana"ers may also consider the economic cycle in determinin" $hether conditions are Cri"htC to ! y f ndamentally s ita!le companies.

C/6%(2(026 06B#:%/(: distin" ish Iin the short r n, the mar#et is a votin" machine, not a $ei"hin" machineI.F9G F ndamental analysis allo$s yo to ma#e yo r o$n decision on val e, and i"nore the mar#et.

V285# 06B#:%/(: restrict their attention to nder4val ed companies, !elievin" that CitCs hard to fall o t of a ditchC. The val e comes from f ndamental analysis.

Mana"ers may se f ndamental analysis to determine f t re "ro$th rates for ! yin" hi"h priced "ro$th stoc#s.

Mana"ers may also incl de f ndamental factors alon" $ith technical factors into comp ter models

F ndamental analysis is the cornerstone of investin". In fact, some $o ld say that yo arenCt really investin" if yo arenCt performin" f ndamental analysis.Beca se the s !ject is so !road, ho$ever, itCs to "h to #no$ $here to start. There are an endless n m!er of investment strate"ies that are very different from each other, yet almost all se the f ndamentals.

The "oal of this t torial is to provide a fo ndation for nderstandin" f ndamental analysis. ItCs "eared primarily at ne$ investors $ho donCt #no$ a !alance sheet from an income statement.Bhile yo may not !e a Istoc#4 pic#er e6traordinaireI !y the end of this t torial, yo $ill have a m ch more solid "rasp of the lan" a"e and concepts !ehind sec rity analysis and !e a!le to se this to f rther yo r #no$led"e in other areas $itho t feelin" totally lost.

The !i""est part of f ndamental analysis involves delvin" into the financial statements. &lso #no$n as 7 antitative analysis, this involves loo#in" at reven e, e6penses, assets, lia!ilities and all the other financial aspects of a company. F ndamental analysts loo# at this information to "ain insi"ht on a companyCs f t re performance. & "ood part of this t torial $ill !e spent learnin" a!o t the !alance sheet, income statement, cash flo$ statement and ho$ they all fit to"ether.

2.2

TECHNICAL ANALYSIS

Technical &nalysis is the forecastin" of f t re financial price movements !ased on an e6amination of past price movements. /i#e $eather forecastin", technical analysis does not res lt in a!sol te predictions a!o t the f t re. Instead, technical analysis can help investors anticipate $hat is Ili#elyI to happen to prices over time. Technical analysis ses a $ide variety of charts that sho$ price over time. Technical analysis is applica!le to stoc#s, indices, commodities, f t res or any trada!le instr ment $here the price is infl enced !y the forces of s pply and demand. 0rice refers to any com!ination of the open, hi"h, lo$, or close for a "iven sec rity over a specific time frame. The time frame can !e !ased on intraday (84min te, <4min tes, 8A4min tes, 8<4min tes, :A4min tes or ho rly), daily, $ee#ly or monthly price data and last a fe$ ho rs or many years. In addition, some technical analysts incl de vol me or open interest fi" res $ith their st dy of price action. In finance, %#1;60128 26289:0: is a sec rity analysis methodolo"y for forecastin" the direction of prices thro "h the st dy of past mar#et data, primarily price and

vol me. Behavioral economics and 7 antitative analysis se many of the same tools of technical analysis,F9GF:GF;GF<G $hich, !ein" an aspect of active mana"ement, stands in contradiction to m ch of modern portfolio theory. The efficacy of !oth technical and f ndamental analysis is disp ted !y the efficient4mar#et hypothesis $hich states that stoc# mar#et prices are essentially npredicta!le.

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The Technical analysis is a methodolo"y to assist yo in decidin" the timin" of investments, $hich is very vital to ma#e $ise investment decisions. The technical analysis is !ased on the ass mption that history tends to repeat itself in the stoc# e6chan"e. If a certain pattern of activity has in the past prod ced certain res lts nine o t of ten, one can ass me a stron" li#elihood of the same o tcome $henever this pattern appears in the f t re. .o$ever technical analysis lac#s a strictly lo"ical e6planation. Technical &nalysis is the st dy of the internal stoc# e6chan"e information and not of those e6ternal factors $hich are reflected in the stoc# mar#et. &ll the relevant factors, $hatever they may !e can !e red ced to the vol me of the stoc# e6chan"e transactions and the level of share price or more "enerally, the s m of the statistical information prod ced !y the mar#et. Fe$ of the most commonly sed technical analysis methods for share mar#et Tradin" are -apanese 2andlestic# (most po$erf l stoc# chartin" method), 0rice 2 rves, Trend /ines, .i"h /o$ 2harts and Movin" avera"es. ( r Technical

&nalysis Soft$are Stoc# tech $ill help yo to !ecome technical analyst on yo r o$n.

T;# B2:0: /< T#1;60128 A6289:0: &t the t rn of the cent ry, the %o$ Theory laid the fo ndations for $hat $as later to !ecome modern technical analysis. %o$ Theory $as not presented as one complete amal"amation, ! t rather pieced to"ether from the $ritin"s of 2harles %o$ over several years. (f the many theorems p t forth !y %o$, three stand o tH

P(01# D0:1/56%: EB#(9%;063 P(01# M/B#&#6%: A(# N/% T/%2889 R267/& D*;2%D I: M/(# I&$/(%26% %;26 D*;9D

P(01# D0:1/56%: EB#(9%;063 This theorem is similar to the stron" and semi4stron" forms of mar#et efficiency. Technical analysts !elieve that the c rrent price f lly reflects all information. Beca se all information is already reflected in the price, it represents the fair val e, and sho ld form the !asis for analysis. &fter all, the mar#et price reflects the s m

#no$led"e of all participants, incl din" traders, investors, portfolio mana"ers, ! y4 side analysts, sell4side analysts, mar#et strate"ist, technical analysts, f ndamental analysts and many others. It $o ld !e folly to disa"ree $ith the price set !y s ch an impressive array of people $ith impecca!le credentials. T#1;60128 26289:0: 5%080E#: %;# 06</(&2%0/6 12$%5(#7 '9 %;# $(01# %/ 06%#($(#% =;2% %;# &2(?#% 0: :29063 =0%; %;# $5($/:# /< </(&063 2 B0#= /6 %;# <5%5(#. P(01#: M/B#&#6%: 2(# 6/% T/%2889 R267/& Most technicians a"ree that prices trend. .o$ever, most technicians also ac#no$led"e that there are periods $hen prices do not trend. If prices $ere al$ays random, it $o ld !e e6tremely diffic lt to ma#e money sin" technical analysis. In his !oo#, Schwager on Futures: Technical Analysis, -ac# Sch$a"er statesH "One way of viewing it is that markets may witness extended periods of random fluctuation, interspersed with shorter periods of nonrandom ehavior! The goal of the chartist is to identify those periods "i!e! ma#or trends$!"

& technician !elieves that it is possi!le to identify a trend, invest or trade !ased on the trend and ma#e money as the trend nfolds. Beca se technical analysis can !e applied to many different time frames, it is possi!le to spot !oth short4term and lon"4term trends. The IBM chart ill strates Sch$a"erCs vie$ on the nat re of the trend. The !road trend is p, ! t it is also interspersed $ith tradin" ran"es. In !et$een the tradin" ran"es are smaller ptrends $ithin the lar"er ptrend. The ptrend is rene$ed $hen the stoc# !rea#s a!ove the tradin" ran"e. & do$ntrend !e"ins $hen the stoc# !rea#s !elo$ the lo$ of the previo s tradin" ran"e.

D*;2%D 0: &/(# 0&$/(%26% %;26 D*;9D In his !oo#, The 0sycholo"y of Technical &nalysis, Tony 0l mmer paraphrases (scar Bilde !y statin", I& technical analyst #no$s the price of everythin", ! t the val e of nothin"I. Technicians, as technical analysts are called, are only concerned $ith t$o thin"sH
1. 2.

*;2% 0: %;# 15((#6% $(01#C *;2% 0: %;# ;0:%/(9 /< %;# $(01# &/B#&#6%C

The price is the end res lt of the !attle !et$een the forces of s pply and demand for the companyCs stoc#. The o!jective of analysis is to forecast the direction of the f t re price. By foc sin" on price and only price, technical analysis represents a direct approach. F ndamentalists are concerned $ith $hy the price is $hat it is. For technicians, the $hy portion of the e7 ation is too !road and many times the f ndamental reasons "iven are hi"hly s spect. Technicians !elieve it is !est to concentrate on $hat and never mind $hy. Bhy did the price "o pJ It is simple, more ! yers (demand) than sellers (s pply). &fter all, the val e of any asset is only $hat someone is $illin" to pay for it. Bho needs to #no$ $hyJ !#6#(28 S%#$: %/ T#1;60128 EB2852%0/6

Many technicians employ a top4do$n approach that !e"ins $ith !road4!ased macro analysis. The lar"er parts are then !ro#en do$n to !ase the final step on a more foc sedMmicro perspective. S ch an analysis mi"ht involve three stepsH 8. Broad mar#et analysis thro "h the major indices s ch as the SK0 <AA, %o$ Ind strials, *&S%&N and *YS' 2omposite. 9. Sector analysis to identify the stron"est and $ea#est "ro ps $ithin the !roader mar#et. :. Individ al stoc# analysis to identify the stron"est and $ea#est stoc#s $ithin select "ro ps. The !ea ty of technical analysis lies in its versatility. Beca se the principles of technical analysis are niversally applica!le, each of the analysis steps a!ove can !e performed sin" the same theoretical !ac#"ro nd. Yo donCt need an economics de"ree to analyDe a mar#et inde6 chart. Yo donCt need to !e a 20& to analyDe a stoc# chart. 2harts are charts. It does not matter if the time frame is 9 days or 9 years. It does not matter if it is a stoc#, mar#et inde6 or commodity. The technical principles of s pport, resistance, trend, tradin" ran"e and other aspects can !e applied to any chart. Bhile this may so nd easy, technical analysis is !y no means easy. S ccess re7 ires serio s st dy, dedication and an open mind. C;2(% A6289:0: Technical analysis can !e as comple6 or as simple as yo $ant it. The e6ample !elo$ represents a simplified version. Since $e are interested in ! yin" stoc#s, the foc s $ill !e on spottin" ! llish sit ations.

OB#(288 T(#67: The first step is to identify the overall trend. This can !e accomplished $ith trend lines, movin" avera"es or pea#Mtro "h analysis. &s lon" as the price remains a!ove its ptrend line, selected movin" avera"es or previo s lo$s, the trend $ill !e considered ! llish. S5$$/(%: &reas of con"estion or previo s lo$s !elo$ the c rrent price mar# s pport levels. & !rea# !elo$ s pport $o ld !e considered !earish. R#:0:%261#: &reas of con"estion and previo s hi"hs a!ove the c rrent price mar# the resistance levels. & !rea# a!ove resistance $o ld !e considered ! llish. M/&#6%5&: Moment m is s ally meas red $ith an oscillator s ch as M&2%. If M&2% is a!ove its @4day 'M& (e6ponential movin" avera"e) or positive, then moment m $ill !e considered ! llish, or at least improvin". B59063@S#88063 P(#::5(#: For stoc#s and indices $ith vol me fi" res availa!le, an indicator that ses vol me is sed to meas re ! yin" or sellin" press re. Bhen 2hai#in Money Flo$ is a!ove Dero, ! yin" press re is dominant. Sellin" press re is domin ant $hen it is !elo$ Dero. R#82%0B# S%(#63%;: The price relative is a line formed !y dividin" the sec rity !y a !enchmar#. For stoc#s it is s ally the price of the stoc# divided !y the SK0 <AA. The plot of this line over a period of time $ill tell s if the stoc# is o tperformin" (risin") or nder performin" (fallin") the major inde6. The final step is to synthesiDe the a!ove analysis to ascertain the follo$in"H

Stren"th of the c rrent trend. Mat rity or sta"e of c rrent trend.

,e$ard to ris# ratio of a ne$ position. 0otential entry levels for ne$ lon" position.

T/$-D/=6 T#1;60128 A6289:0: For each se"ment (mar#et, sector and stoc#), an investor $o ld analyDe lon"4term and short4term charts to find those that meet specific criteria. &nalysis $ill first consider the mar#et in "eneral, perhaps the SK0 <AA. If the !roader mar#et $ere considered to !e in ! llish mode, analysis $o ld proceed to a selection of sector charts. Those sectors that sho$ the most promise $o ld !e sin"led o t for individ al stoc# analysis. (nce the sector list is narro$ed to :4; ind stry "ro ps, individ al stoc# selection can !e"in. Bith a selection of 8A49A stoc# charts from each ind stry, a selection of :4; of the most promisin" stoc#s in each "ro p can !e made. .o$ many stoc#s or ind stry "ro ps ma#e the final c t $ill depend on the strictness of the criteria set forth. )nder this scenario, $e $o ld !e left $ith @489 stoc#s from $hich to choose. These stoc#s co ld even !e !ro#en do$n f rther to find the :4; of the stron"est of the stron".

S%(#63%;: /< T#1;60128 A6289:0:


F/15: /6 P(01# If the o!jective is to predict the f t re price, then it ma#es sense to foc s on price movements. 0rice movements s ally precede f ndamental developments. By foc sin" on price action, technicians are a tomatically foc sin" on the f t re. The mar#et is tho "ht of as a leadin" indicator and "enerally leads the economy !y = to

@ months. To #eep pace $ith the mar#et, it ma#es sense to loo# directly at the price movements. More often than not, chan"e is a s !tle !east. 'ven tho "h the mar#et is prone to s dden #nee4jer# reactions, hints s ally develop !efore si"nificant moves. & technician $ill refer to periods of acc m lation as evidence of an impendin" advance and periods of distri! tion as evidence of an impendin" decline. S5$$89) D#&267) 267 P(01# A1%0/6 Many technicians se the open, hi"h, lo$ and close $hen analyDin" the price action of a sec rity. There is information to !e "leaned from each !it of information. Separately, these $ill not !e a!le to tell m ch. .o$ever, ta#en to"ether, the open, hi"h, lo$ and close reflect forces of s pply and demand.

The annotated e6ample a!ove sho$s a stoc# that opened $ith a "ap p. Before the open, the n m!er of ! y orders e6ceeded the n m!er of sell orders and the price $as raised to attract more sellers. %emand $as !ris# from the start. The intraday hi"h reflects the stren"th of demand (! yers). The intraday lo$ reflects the availa!ility of s pply (sellers). The close represents the final price a"reed pon !y the ! yers and the sellers. In this case, the close is $ell !elo$ the hi"h and m ch closer to the lo$. This tells s that even tho "h demand (! yers) $as stron" d rin" the day, s pply (sellers) ltimately prevailed and forced the price !ac# do$n. 'ven after this sellin" press re, the close remained a!ove the open. By loo#in" at price action over an e6tended period of time, $e can see the !attle !et$een s pply and demand nfold. I6 0%: &/:% '2:01 </(&) ;03;#( $(01#: (#<8#1% 061(#2:#7 7#&267 267 8/=#( $(01#: (#<8#1% 061(#2:#7 :5$$89.

S5$$/(%@R#:0:%261# Simple chart analysis can help identify s pport and resistance levels. These are s ally mar#ed !y periods of con"estion (tradin" ran"e) $here the prices move $ithin a confined ran"e for an e6tended period, tellin" s that the forces of s pply and demand are deadloc#ed. Bhen prices move o t of the tradin" ran"e, it si"nals that either s pply or demand has started to "et the pper hand. I< $(01#: &/B# 2'/B# %;# 5$$#( '267 /< %;# %(27063 (263#) %;#6 7#&267 0: =066063. I< $(01#: &/B# '#8/= %;# 8/=#( '267) %;#6 :5$$89 0: =066063. P01%/(028 P(01# H0:%/(9 'ven if yo are a tried and tr e f ndamental analyst, a price chart can offer plenty of val a!le information. The price chart is an easy to read historical acco nt of a sec rityCs price movement over a period of time. 2harts are m ch easier to read than a ta!le of n m!ers. (n most stoc# charts, vol me !ars are displayed at the !ottom. Bith this historical pict re, it is easy to identify the follo$in"H

,eactions prior to and after important events. 0ast and present volatility. .istorical vol me or tradin" levels. ,elative stren"th of a stoc# vers s the overall mar#et.

A::0:% =0%; E6%(9 P/06% Technical analysis can help $ith timin" a proper entry point. Some analysts se f ndamental analysis to decide $hat to ! y and technical analysis to decide $hen

to ! y. It is no secret that timin" can play an important role in performance. Technical analysis can help spot demand (s pport) and s pply (resistance) levels as $ell as !rea#o ts. Simply $aitin" for a !rea#o t a!ove resistance or ! yin" near s pport levels can improve ret rns. It is also important to #no$ a stoc#Cs price history. If a stoc# yo tho "ht $as "reat for the last 9 years has traded flat for those t$o years, it $o ld appear that Ball Street has a different opinion. If a stoc# has already advanced si"nificantly, it may !e pr dent to $ait for a p ll!ac#. (r, if the stoc# is trendin" lo$er, it mi"ht pay to $ait for ! yin" interest and a trend reversal.

*#2?6#::#: /< T#1;60128 A6289:0:


A6289:% B02: - st as $ith f ndamental analysis, technical analysis is s !jective and o r personal !iases can !e reflected in the analysis. It is important to !e a$are of these !iases $hen analyDin" a chart. If the analyst is a perpet al ! ll, then a ! llish !ias $ill overshado$ the analysis. (n the other hand, if the analyst is a dis"r ntled eternal !ear, then the analysis $ill pro!a!ly have a !earish tilt. O$#6 %/ I6%#($(#%2%0/6 F rtherin" the !ias ar" ment is the fact that technical analysis is open to interpretation. 'ven tho "h there are standards, many times t$o technicians $ill loo# at the same chart and paint t$o different scenarios or see different patterns. Both $ill !e a!le to come p $ith lo"ical s pport and resistance levels as $ell as #ey !rea#s to j stify their position. Bhile this can !e fr stratin", it sho ld !e

pointed o t that technical analysis is more li#e an art than a science, some$hat li#e economics. Is the c p half4empty or half4f llJ It is in the eye of the !eholder.

T// L2%# Technical analysis has !een criticiDed for !ein" too late. By the time the trend is identified, a s !stantial portion of the move has already ta#en place. &fter s ch a lar"e move, the re$ard to ris# ratio is not "reat. /ateness is a partic lar criticism of %o$ Theory. A8=29: A6/%;#( L#B#8 'ven after a ne$ trend has !een identified, there is al$ays another IimportantI level close at hand. Technicians have !een acc sed of sittin" on the fence and never ta#in" an n7 alified stance. 'ven if they are ! llish, there is al$ays some indicator or some level that $ill 7 alify their opinion. T(27#(>: R#&/(:# *ot all technical si"nals and patterns $or#. Bhen yo !e"in to st dy technical analysis, yo $ill come across an array of patterns and indicators $ith r les to match. For instanceH & sell si"nal is "iven $hen the nec#line of a head and sho lders pattern is !ro#en. 'ven tho "h this is a r le, it is not steadfast and can !e s !ject to other factors s ch as vol me and moment m. In that same vein, $hat $or#s for one partic lar stoc# may not $or# for another. & <A4day movin" avera"e may $or# "reat to identify s pport and resistance for IBM, ! t a >A4day movin"

avera"e may $or# !etter for Yahoo. 'ven tho "h many principles of technical analysis are niversal, each sec rity $ill have its o$n idiosyncrasies.

. HISTORY
The principles of technical analysis are derived from h ndreds of years of financial mar#ets data. Some aspects of technical analysis !e"an to appear in -oseph de la Ve"aCs acco nts of the % tch mar#ets in the 8>th cent ry. In &sia, technical analysis is said to !e a method developed !y .omma M nehisa d rin" early 8?th cent ry $hich evolved into the se of candlestic# techni7 es, and is today a technical analysis chartin" tool. In the 8@9As and 8@:As ,ichard B. Scha!ac#er p !lished several !oo#s $hich contin ed the $or# of 2harles %o$ and Billiam 0eter .amilton in their !oo#s Stock %arket Theory and &ractice and Technical %arket Analysis. In 8@;? ,o!ert %. 'd$ards and -ohn Ma"ee p !lished Technical Analysis of Stock Trends $hich is $idely considered to !e one of the seminal $or#s of the discipline. It is e6cl sively concerned $ith trend analysis and chart patterns and remains in se to the present. &s is o!vio s, early technical analysis $as almost e6cl sively the analysis of charts, !eca se the processin" po$er of comp ters $as not availa!le for statistical analysis. 2harles %o$ reportedly ori"inated a form of point and fi" re chart analysis. %o$ Theory is !ased on the collected $ritin"s of %o$ -ones co4fo nder and editor 2harles %o$, and inspired the se and development of modern technical analysis at the end of the 8@th cent ry. (ther pioneers of analysis techni7 es incl de ,alph

*elson 'lliott, Billiam %el!ert +ann and ,ichard Byc#off $ho developed their respective techni7 es in the early 9Ath cent ry. More technical tools and theories have !een developed and enhanced in recent decades, $ith an increasin" emphasis on comp ter4assisted techni7 es sin" specially desi"ned comp ter soft$are.

F. IMPORTANT ELEMENT OF FUNDAMENTAL ANALYSIS


.avin" a !asic #no$led"e of f ndamental analysis $ill "ive yo a !etter fo ndation for yo r investment decisions. /earn < core elements in F ndamental &nalysis and nderstand $hy yo sho ld se it $hen investin". Yo $ill learn ho$ to find relevant information in earnin" reports from the listed companies. T;0: 2(%018# $(/B07#: 2 3507#806# /6 =;#(# %/ :%2(% =;#6 7/063 <5672&#6%28 26289:0:. I% 1/B#(: %;# </88/=063 2:$#1%: 267 #82'/(2%#: /6 %;# $(0610$8#::

*;2% 0: <5672&#6%28 26289:0:C *;9 5:# <5672&#6%28 26289:0:C T;# %(5# B285# /< 2 :%/1?C F ?#9 <21%/(: %/ 8//? </( B59063 2% %;# (03;% $(01#

F ndamental analysis is critical component in stoc# analysis. It is 7 ite accessi!le, e6tremely val a!le and yo act ally donCt need a finance de"ree to "et a !asic nderstandin" of it. The pro!lem of f ndamental analysis is ho$ever that it can very easily "et 7 ite complicated, ! t it doesnCt have to !e.

*;2% 0: 2 F5672&#6%28 A6289:0:C & f ndamental analysis is all a!o t "ettin" an nderstandin" of a company, the health of its ! siness and its f t re prospects. It incl des readin" and analyDin" ann al reports and financial statements to "et an nderstandin" of the companyCs comparative advanta"es, competitors and its mar#et environment.

*;9 5:# <5672&#6%28 26289:0:C F ndamental analysis is ! ilt on the idea that the stoc# mar#et may price a company $ron" from time to time. 0rofits can !e made !y findin" nderpriced stoc#s and $aitin" for the mar#et to adj st the val ation of the company. By analyDin" the financial reports from companies yo $ill "et an nderstandin" of the val e of different companies and nderstand the pricin" in the stoc# mar#et. &fter analyDin" these factors yo have a !etter nderstandin" of $hether the price of the stoc# is nderval ed or overval ed at the c rrent mar#et price. F ndamental analysis can also !e performed on a sectors !asis and in the economy as a $hole. T;# %(5# B285# /< 2 :%/1?C For a f ndamental analyst, the mar#et price of a stoc# tends to move to$ards its Cintrinsic val eC, $hich is the Ctr e val eC of a company as calc lated !y its f ndamentals. If the mar#et val e does not match the tr e val e of the company, there is an investment opport nity. '6ample of this is that if the c rrent mar#et price of a stoc# is lo$er than the intrinsic price, the investor sho ld p rchase the stoc# !eca se he e6pects the stoc#

price to rise and move to$ards its tr e val e. &lternatively, if the c rrent mar#et price is a!ove the intrinsic price, the stoc# is considered over!o "ht and the investor sells the stoc# !eca se he #no$s that the stoc# price $ill fall and move closer to its intrinsic val e. To determine the tr e price of the companyCs stoc#, the follo$in" factors need to !e considered.

K#9 <21%/(: %/ 8//? </( E2(6063: The #ey element all investors loo# after is #2(6063:. Before investin" in a company yo $ant to #no$ ho$ m ch the company is ma#in" in profits. F t re earnin"s are a #ey factor as the f t re prospects of the companyCs ! siness and potential "ro$th opport nities are determinants of the stoc# price. Factors determinin" earnin"s of the company are s ch as sales, costs, assets and lia!ilities. & simplified vie$ of the earnin"s is #2(6063: $#( :;2(# (EPS). This is a fi" re of the earnin"s $hich denotes the amo nt of earnin"s for each o tstandin" share.

P(/<0% M2(306: &mo nt of earnin"s do not tell the f ll story, increasin" earnin"s are "ood ! t if the cost increases more than reven es then the profit mar"in is not improvin". The $(/<0% &2(306 meas res ho$ m ch the company #eeps in earnin"s o t of every

dollar of their reven es. This meas re is therefore very sef l for comparin" similar companies, $ithin the same ind stry. .i"her profit mar"in indicates that the company has !etter control over its costs than its competitors. 0rofit mar"in is displayed in percenta"es and a 8A percent profit mar"in denotes that the company has a net income of 8A cents for each dollar of their reven es. To "et !etter nderstandin" of profit mar"ins it is "ood to compare t$o companies $ith alternative mar"ins, see ta!le !elo$. R#%5(6 /6 EG50%9 (ROE) ,et rn of e7 ity (,(') is a financial ratio that does 6/% acco nt for the stoc# price. Since it i"nores the price entirely it is !y many tho "ht of as THE most important financial meas re. It can !asically !e tho "ht of as the parent ratio that al$ays needs to !e considered. This ratio is a meas re of ho$ efficient a company is in "eneratin" its profits. It is a ratio of reven e and profits to o$nersC e7 ity (shareholders are the o$ners). Specifically it isH &n easy e6ample of this is that if company & and company B !oth "enerate net profits of O8 Million ! t company & has e7 ity of O8A Million ! t company B has e7 ity of O8AA Million. Their ,(' $o ld !e 8AP and 8P respectively meanin" that company & is more efficient as it $as a!le to prod ce the same amo nt of earnin"s $ith 8A times less e7 ity. The reason for $hy this meas re is so important is !eca se it contains information a!o t several factors, s ch asH

/evera"e ($hich is the de!t of the company) ,even e, profits and mar"ins ,et rnin" val es to shareholders

+ood appro6imation is that ,(' sho ld !e 8A4;AP "reater than its peer.

P(01#-%/-E2(6063: (P@E)Bhen ta#in" the c rrent mar#et price into consideration, the most pop lar ratio is the 0rice4to4'arnin"s (0M') ratio. &s the name s ""est it is the c rrent mar#et price divided !y its earnin"s per share ('0S). It is an easy $ay to "et a 7 ic# loo# of a stoc#Cs val e. & hi"h 0M' indicates that the stoc# is priced relatively hi"h to its earnin"s, and companies $ith hi"her 0M' therefore seem more e6pensive. .o$ever, this meas re, as $ell as other financial ratios, needs to !e compared to similar companies $ithin the same sector or to its o$n historical 0M'. This is d e to different characteristics in different sectors and chan"in" mar#ets conditions. This ratio does not tell the f ll story since it does not acco nt for "ro$th. *ormally, companies $ith hi"h earnin"s "ro$th are traded at hi"her 0M' val es than companies $ith more moderate "ro$th rate. &ccordin"ly, if the company is "ro$in" rapidly and is e6pected to maintain its "ro$th in the f t re this c rrent mar#et price mi"ht not seem so e6pensive. This is the reasonin" for the e6istence of different investment stylesE Val e vs. +ro$th stoc#s. EH2&$8# Bhile some sectors normally have lo$ 0M' meas res, other sectors commonly have hi"her ratios. For e6ample, tilities commonly have 0M' ran"in" from < to 8A

$hile technolo"y companies commonly have a 0M' ratio ran"in" from 8< to 9A or a!ove. This is d e to e6pectations in the mar#et a!o t the sector and its earnin"s4 "ro$th possi!ilities. The tility sector has sta!le earnin"s and is not e6pected to "ro$ rapidly $hile technolo"y companies are e6pected to "ro$ faster and tend to need less capital for its "ro$th. In order to simplify, the follo$in" ta!le ill strates fo r companies in t$o sectors $ith alternative fi" res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n order to acco nt for "ro$th, the 0M' ratio can !e modified into the P(01#@E2(6063: %/ !(/=%; (PE!) ratio. & 0'+ ratio is calc lated !y dividin" the stoc#Cs 0M' ratio !y its e6pected 89 month "ro$th rate. & common r le of th m! is that the "ro$th rate o "ht to !e ro "hly e7 al to the 0M' ratio and th s the 0'+ ratio sho ld !e aro nd 8. & relatively lo$ 0'+ ratio indicates an nderval ed stoc# and a 0'+ ratio m ch "reater than 8 indicates an overval ed stoc#. The 0'+ ratio can !e very informative fi" re, especially for fast "ro$in" and cyclical companies. In this one ratio yo "et an nderstandin" of the companyCs

earnin"s, "ro$th e6pectations and $hether it is tradin" at a reasona!le price relative to its f ndamentals.

P(01#-%/-B//? (P@B) & price4to4!oo# (0MB) ratio is sed to compare a stoc#Cs mar#et val e to its !oo# val e. It can !e calc lated as the c rrent share price divided to the !oo# val e per share, accordin" to previo s financial statement. In a !roader sense, it can also !e calc lated as the total mar#et capitaliDation of the company divided !y all the shareholders e7 ity. This ratio "ives certain idea of $hether yo are payin" too hi"h price for the stoc# as it denotes $hat $o ld !e the resid al val e if the company $ent !an#r pt today. & hi"her 0MB ratio than 8 denotes that the share price is hi"her than $hat the companyCs assed $o ld !e sold for. The difference indicates $hat investors thin# a!o t the f t re "ro$th potential of the company.

B59063 2% %;# (03;% $(01#C In the lon" r n the stoc# price sho ld reflect its f ndamental tr e val e. .o$ever in the short r n a stoc# mi"ht have "reat f ndamentals ! t still !e movin" in $ron" direction. This can !e d e to other factors, s ch as ne$s releases and chan"es in

f t re o tloo#, $hich also have effect on the price. Trends in the mar#et and investors emotions also effect the short4term fl ct ation in stoc# prices res ltin" in the c rrent mar#et price deviatin" from its tr e val e. (ne 7 estion that is important to consider isH I'hat is the difference etween a great usiness and a great investment(I 4the ans$er is IpriceI. If yo pay too hi"h price for even the !est stoc# in the $orld, yo $ill never ma#e a "ood ret rn on yo r investment. Therefore, a "reat investment does not li#ely have a hi"h price. The point of this 7 estion is that the price yo pay for a stoc# does matter enormo slyE it is the most important factor in yo r ret rn. &ccordin"ly, doin" yo r f ndamental analysis (thoro "hly) is of a "reat importance $hen ma#in" yo r investments. Bhen determinin" $hether a companyCs stoc# is a "ood investment, f ndamental analysis is a "reat tool!o6 to reach a concl sion.

". CONCEPT OF FUNDAMENTAL ANALYSIS OF STOCK MARKET


F5672&#6%28 26289:0: is a !road s !jectE itQs to "h to #no$ $here to start from. There is no end of the strate"ies !ein" sed and $hich are 7 ite different from each other, almost all se the f ndamentals. F ndamental analysis involves di""in" into financial statements. It is also #no$n as 7 antitative analysis. This involves loo#in" at reven es, e6penses, assets, lia!ilities and other financial aspects of a company. F ndamental analysts loo# at this information to "ain insi"ht on a companyCs f t re performance. Basically itQs a cornerstone of investin". There is a myth that if yo are not performin" F ndamental analysis that means yo are not really investin". The f ndamental analysis is a tool that attempts to determine a sec rityQs val e !y foc sin" on 7 antitative and 7 ality factors that affect a companyCs ! siness and its f t re prospects. Yo can perform f ndamental analysis on economy. F21%/(: /< <5672&#6%28 26289:0::

N antitative factor is capa!le of !ein" meas red or e6pressed in n merical terms. N antitative f ndamentals are n meric, meas ra!le characteristics a!o t a ! siness. N antitative factor represent aspects of a companyCs ! siness that are diffic lt or impossi!le to 7 antify, incorporatin" that #ind of information into a pricin" eval ation can !e 7 ite diffic lt. Yo sho ld !e a$are of B siness Model, competitive advanta"e, mana"ement, corporate "overnance etc. N alitative factor is related to or !ased on the 7 ality or character of somethin", often as opposed to its siDe or 7 antity. They are the less tan"i!le factors s rro ndin" a ! siness. Yo sho ld !e a$are of mar#et share, ind stry "ro$th, competition, re" lation etc.

*either 7 alitative nor 7 antitative analysis is inherently !etter than the other. +oal of f ndamental analysis is to ma#e financial forecasts and the f ndamental analysis is done on the historical and present data. /etQs disc ss some hi"hly important o!jectives of F ndamental analysis. It is done to calc late credit ris#s. It also ma#e internal ! siness decisions, it is also sed to ma#e projection on its ! siness performance. It is also sed to cond ct a company stoc# val ation and predict the price eval ation. (ne of the primary ass mptions of f ndamental analysis is that the price on the stoc# mar#et does not f lly reflect a stoc#Qs RrealS val e. 2oncept of intrinsic val e ta#es place in f ndamental analysis. It is important to address the s !ject of intrinsic val e. In the lon" r n, the stoc# mar#et $ill reflect the f ndamentals. There is no point in ! yin" a stoc# !ased on intrinsic val e if the price never reflected that val e. *o!ody #no$s ho$ lon" Rthe lon" r nS really is. &n investor can estimate the intrinsic val e of a firm from $here they can ! y at disco nt. Basic thin" is that yo donQt #no$ $hether yo r estimate of intrinsic

val e is correct and even yo donQt #no$ ho$ lon" it $ill ta#e for the intrinsic val e to !e reflected in the mar#etplace.

Bhen $e tal# a!o t f ndamental analysis it is 7 ite necessary to #no$ $hat e6actly financial statements are. Financial statements are the medi m !y $hich a company discloses information concernin" its financial performance. The f ndamental analyst se the 7 antitative information "leaned from financial statements to ma#e investments decisions. T;(## &/:% 0&$/(%26% <06261028 :%2%#&#6%: 2(#:

Income statements Balance sheets 2ash flo$ statements

The income statement meas res a companyCs performance over a specific time frame. Technically, yo co ld have a !alance sheet for a month or even a day, ! t yo Cll only see p !lic companies report 7 arterly and ann ally. The !alance sheet represents a record of a companyCs assets, lia!ilities and e7 ity at a partic lar point in time. The statement of cash flo$s represents a record of a ! sinessC cash inflo$s and o tflo$s over a period of time. The cash flo$ statement is important !eca se itCs very diffic lt for a ! siness to manip late its cash sit ation.

!#6#(28 S%#$: %/ F5672&#6%28 EB2852%0/6

'ven tho "h there is no one clear4c t method, a !rea#do$n is presented !elo$ in the order an investor mi"ht proceed. This method employs a top4do$n approach that starts $ith the overall economy and then $or#s do$n from ind stry "ro ps to specific companies. &s part of the analysis process, it is important to remem!er that all information is relative. Ind stry "ro ps are compared a"ainst other ind stry "ro ps and companies a"ainst other companies. )s ally, companies are compared $ith others in the same "ro p. For e6ample, a telecom operator (VeriDon) $o ld !e compared to another telecom operator (SB2 2orp), not to an oil company (2hevronTe6aco). E1/6/&01 F/(#12:% First and foremost in a top4do$n approach $o ld !e an overall eval ation of the "eneral economy. The economy is li#e the tide and the vario s ind stry "ro ps and individ al companies are li#e !oats. Bhen the economy e6pands, most ind stry "ro ps and companies !enefit and "ro$. Bhen the economy declines, most sectors and companies s ally s ffer. Many economists lin# economic e6pansion and contraction to the level of interest rates. Interest rates are seen as a leadin" indicator for the stoc# mar#et as $ell. Belo$ is a chart of the SK0 <AA and the yield on the 8A4year note over the last :A years. &ltho "h not e6act, a correlation !et$een stoc# prices and interest rates can !e seen. (nce a scenario for the overall economy has !een developed, an investor can !rea# do$n the economy into its vario s ind stry "ro ps.

!(/5$ S#8#1%0/6

If the pro"nosis is for an e6pandin" economy, then certain "ro ps are li#ely to !enefit more than others. &n investor can narro$ the field to those "ro ps that are !est s ited to !enefit from the c rrent or f t re economic environment. If most companies are e6pected to !enefit from an e6pansion, then ris# in e7 ities $o ld !e relatively lo$ and an a""ressive "ro$th4oriented strate"y mi"ht !e advisa!le. & "ro$th strate"y mi"ht involve the p rchase of technolo"y, !iotech, semicond ctor and cyclical stoc#s. If the economy is forecast to contract, an investor may opt for a more conservative strate"y and see# o t sta!le income4oriented companies. & defensive strate"y mi"ht involve the p rchase of cons mer staples, tilities and ener"y4related stoc#s. To assess a ind stry "ro pCs potential, an investor $o ld $ant to consider the overall "ro$th rate, mar#et siDe, and importance to the economy. Bhile the individ al company is still important, its ind stry "ro p is li#ely to e6ert j st as m ch, or more, infl ence on the stoc# price. Bhen stoc#s move, they s ally move as "ro psE there are very fe$ lone " ns o t there. Many times it is more important to !e in the ri"ht ind stry than in the ri"ht stoc#L The chart !elo$ sho$s that relative performance of < sectors over a >4month time frame. &s the chart ill strates, !ein" in the ri"ht sector can ma#e all the difference.

N2((/= *0%;06 %;# !(/5$ (nce the ind stry "ro p is chosen, an investor $o ld need to narro$ the list of companies !efore proceedin" to a more detailed analysis. Investors are s ally interested in findin" the leaders and the innovators $ithin a "ro p. The first tas# is to identify the c rrent ! siness and competitive environment $ithin a "ro p as

$ell as the f t re trends. .o$ do the companies ran# accordin" to mar#et share, prod ct position and competitive advanta"eJ Bho is the c rrent leader and ho$ $ill chan"es $ithin the sector affect the c rrent !alance of po$erJ Bhat are the !arriers to entryJ S511#:: 7#$#67: /6 26 #73#) '# 0% &2(?#%063) %#1;6/8/39) &2(?#% :;2(# /( 066/B2%0/6. & comparative analysis of the competition $ithin a sector $ill help identify those companies $ith an ed"e, and those most li#ely to #eep it.

C/&$269 A6289:0: Bith a shortlist of companies, an investor mi"ht analyDe the reso rces and capa!ilities $ithin each company to identify those companies that are capa!le of creatin" and maintainin" a competitive advanta"e. The analysis co ld foc s on selectin" companies $ith a sensi!le ! siness plan, solid mana"ement and so nd financials. B5:06#:: P826 The ! siness plan, model or concept forms the !edroc# pon $hich all else is ! ilt. If the plan, model or concepts stin#, there is little hope for the ! siness. For a ne$ ! siness, the 7 estions may !e theseH %oes its ! siness ma#e senseJ Is it feasi!leJ Is there a mar#etJ 2an a profit !e madeJ For an esta!lished ! siness, the 7 estions may !eH Is the companyCs direction clearly definedJ Is the company a leader in the mar#etJ 2an the company maintain leadershipJ

M2623#&#6% In order to e6ec te a ! siness plan, a company re7 ires top47 ality mana"ement. Investors mi"ht loo# at mana"ement to assess their capa!ilities, stren"ths and $ea#nesses. 'ven the !est4laid plans in the most dynamic ind stries can "o to $aste $ith !ad mana"ement (&M% in semicond ctors). &lternatively, even stron" mana"ement can ma#e for e6traordinary s ccess in a mat re ind stry (&lcoa in al min m). Some of the 7 estions to as# mi"ht incl deH .o$ talented is the mana"ement teamJ %o they have a trac# recordJ .o$ lon" have they $or#ed to"etherJ 2an mana"ement deliver on its promisesJ If mana"ement is a pro!lem, it is sometimes !est to move on. F06261028 A6289:0: The final step to this analysis process $o ld !e to ta#e apart the financial statements and come p $ith a means of val ation. Belo$ is a list of potential inp ts into a financial analysis. &cco nts 0aya!le &cco nts ,eceiva!le &cid ,atio &mortiDation &ssets 4 2 rrent &ssets 4 Fi6ed Boo# Val e Brand B siness 2ycle B siness Idea +ood Bill +ross 0rofit Mar"in +ro$th Ind stry Interest 2over International Investment /ia!ilities 4 2 rrent /ia!ilities 4 /on"4term Mana"ement

B siness Model B siness 0lan 2apital '6penses 2ash Flo$ 2ash on hand 2 rrent ,atio 2 stomer ,elationships %ays 0aya!le %ays ,eceiva!le %e!t %e!t Str ct re %e!t '7 ity ,atio %epreciation %erivatives4.ed"in" %isco nted 2ash Flo$ %ividend %ividend 2over 'arnin"s 'BIT%& 'conomic +ro$th '7 ity '7 ity ,is# 0remi m '6penses

Mar#et +ro$th Mar#et Share *et 0rofit Mar"in 0a"e vie$ +ro$th 0a"e vie$s 0atents 0riceMBoo# Val e 0riceM'arnin"s 0'+ 0riceMSales 0rod ct 0rod ct 0lacement ,e" lations ,K% ,even es Sector Stoc# (ptions Strate"y S !scri!er +ro$th S !scri!ers S pplier ,elationships Ta6es Trademar#s Bei"hted &vera"e 2ost of 2apital

The list can seem 7 ite lon" and intimidatin". .o$ever, after a $hile, an investor $ill learn $hat $or#s !est and develop a set of preferred analysis techni7 es.

There are many different val ation metrics and m ch depends on the ind stry and sta"e of the economic cycle. & complete financial model can !e ! ilt to forecast f t re reven es, e6penses and profits or an investor can rely on the forecast of other analysts and apply vario s m ltiples to arrive at a val ation. Some of the more pop lar ratios are fo nd !y dividin" the stoc# price !y a #ey val e driver.

R2%0/ C/&$269 T9$# 0riceMBoo# Val e 0riceM'arnin"s (il *et$or#in" 0riceMSales 0riceMS !scri!ers 0riceM/ines 0riceM0a"e vie$s 0riceM0romises This methodolo"y ass mes that a company $ill sell at a specific m ltiple of its earnin"s, reven es or "ro$th. &n investor may ran# companies !ased on these val ation ratios. Those at the hi"h end may !e considered overval ed, $hile those at the lo$ end may constit te relatively "ood val e. P5%%063 0% A88 T/3#%;#( B9B IS0 or ca!le company Telecom Be! site Biotech 0riceM'arnin"sM+ro$th ,etail

&fter all is said and done, an investor $ill !e left $ith a handf l of companies that stand o t from the pac#. (ver the co rse of the analysis process, an nderstandin" $ill develop of $hich companies stand o t as potential leaders and innovators. In addition, other companies $o ld !e considered la""ards and npredicta!le.

I. BASIC FUNDAMENTAL ANALYSIS FOR BE!INEER IN


STOCK MARKET
F ndamental &nalysis 'veryone in Stoc# Mar#et has his o$n approach. In F5672&#6%28 A6289:0:, I sed to loo# at companies $ith t$o simple parameters, $hich "ave "ood res lts. This is o r Tsimple and happyQ $ay ! t "ivin" "ood res ltsL The t$o parameters areH 8. Sales to e7 ity at least 8A times. This is !eca se the more the n m!er of times the t rnover to e7 ity, the !etter it is for the company and the shareholders. Yo can list s ch companies and choose the !est amon" them. 9. +ross 0rofit ratioU ;AP. (!vio sly $itho t profita!ility, t rnover has no meanin". The reason for choosin" "ross profit ratio is it sho$s the operational efficiency. Yo can list s ch companies and choose the !est amon"st them.

If yo are a !e"inner to F5672&#6%28 A6289:0: of the Stoc# Mar#et, sin" o r Tsimple and happyQ $ay, learn more a!o t the a!ove ratios from !oo#s and other so rces. There are a lot of other parameters s ch as ,(I, *et profit ,atio, Inventory t rnover ratio and so on. If yo try to learn everythin", yo $ill "et conf sed. &fter learnin" these ratios, yo can shortlist a fe$ companies !y com!inin" the a!ove t$o parameters. &fter this, yo may "et the list of companies vetted !y an e6pert for ind stry prospects, competition, 7 ality of mana"ement and past trac# record and choose, may !e the !est ten shares. Yo can do this step in a matter of an ho r provided yo are a!le to meet the ri"ht e6pert. Yo can choose the e6pert $ith the help of yo r Financial Mentor. &nother R0:? M2623#&#6% yo can !rin" in is to ! y the short listed shares !ased $ee#ly charts. Bee#ly charts are safer as compared to daily charts, tho "h at times "ive late si"nals, ! t that is alri"ht for a person $ith a time horiDon of three years or more. &s yo "ain more e6perience and sim ltaneo sly #eep st dyin" the mar#et, yo $ill develop yo r o$n propriety system and that $ill !e the !est for yo .

4. TECHNICAL ANALYSIS BASED SHARE TRADIN! TIPS FOR STOCK MARKET


&ll o r Free Stoc# Tips and Free Intraday tips are !ased on Technical analysis of stoc#s done sin" o r Technical &nalysis Soft$are Stoc# tech . Be are pro d of 0rovidin" %aily Free Stoc# Tradin" Tips and Bee#ly Free Stoc#s to B y and sell Tips !ased on Technical analysis $ith *o strin"s attached i.e. *o need for ,e"istration, *o 2har"es, *o Trial 0eriod and al$ays Free. &ll o r Free Stoc# Tips are s pported !y Technical &nalysis chart and Si"nal $hich "ives yo more freedom to ma#e a $ise investment decision. &lso $e do Indian Stoc# Mar#et analysis and provide information a!o t performance of stoc#s in last 99 tradin" sessions in stoc# mar#et pdated on all the tradin" days $hich ena!les yo to #no$ $hich stoc#s are hot and risin", $hich stoc#s are fallin" and $hich stoc#s are consolidatin". Instr ctions for sin" Intraday Tradin" Tips

Be 0rovide %aily %ay Tradin" Tips $ith B y or sell level and tar"ets. There is *( T,I&/ 0',I(%, al$ays F,''. The stoc#s for intraday tradin" are caref lly selected !ased on technical analysis and tar"et and stop loss val es arrived sin" +ann calc lator. These recommendations are only for those $ho contin o sly monitor the price movements and 7 ic#ly ma#e decision.

,. DIFFERENCE BET*EEN FUNDAMENTAL AND TECHNICAL ANALYSIS


These terms refer to t$o different stoc#4pic#in" methodolo"ies sed for researchin" and forecastin" the f t re "ro$th trends of stoc#s. /i#e any investment strate"y or philosophy, !oth have their advocates and adversaries. .ere are the definin" principles of each of these methods of stoc# analysisH

F ndamental analysis is a method of eval atin" sec rities !y attemptin" to meas re the intrinsic val e of a stoc#. F ndamental analysts st dy everythin" from the overall economy and ind stry conditions to the financial condition and mana"ement of companies. Technical analysis is the eval ation of sec rities !y means of st dyin" statistics "enerated !y mar#et activity, s ch as past prices and vol me. Technical analysts do not attempt to meas re a sec rityCs intrinsic val e ! t instead se stoc# charts to identify patterns and trends that may s ""est $hat a stoc# $ill do in the f t re.

In the $orld of stoc# analysis, f ndamental and technical analysis are on completely opposite sides of the spectr m. 'arnin"s, e6penses, assets and lia!ilities are all important characteristics to f ndamental analysts, $hereas technical analysts co ld not care less a!o t these n m!ers. Bhich strate"y $or#s !est is al$ays de!ated, and many vol mes of te6t!oo#s have !een $ritten on !oth of these methods. So, do some readin" and decide for yo rself $hich strate"y $or#s !est $ith yo r investment philosophy.

8A.

TECHNICAL VS. FUNDAMENTAL STOCK TRADIN!

Stoc# traders need tools and indicators to predict the f t re price action of stoc#s. The tools traders se can !e divided into the camps of f ndamental analysis and technical analysis. The style $hich $or#s !est for an individ al trader is s ally dependent on the traderCs !ac#"ro nd, comfort $ith the tools and tradin" "oals.

F5672&#6%28 A6289:0: F ndamental analysis loo#s at the financial data of the company !ehind the stoc# to determine $hether the companyCs ! siness $ill res lt in a hi"her or lo$er stoc# price. F ndamental analysis loo#s at reven es, profits and losses and ! siness trends, as $ell as see#in" "ro$th factors that $ill affect the stoc# price. F ndamental analysis may also revie$ more macroeconomic factors s ch as a companyCs ! siness sector and the overall economy in relation to a companyCs lines

of ! siness. F ndamental analysis is "eared to$ard ! yin" the company !ehind the stoc#. T#1;60128 A6289:0: Technical analysis of stoc# prices !asically i"nores the company !ehind a stoc#. Technical analysis loo#s only at price and vol me action. The theory !ehind technical analysis is all information a!o t a stoc# is reflected in the share price and analyDin" the price movements $ill predict $here a stoc# price $ill "o from here. Traders sin" technical analysis rely on stoc# price charts, $hich incl de analytical indicators to help traders reco"niDe price trends or reversals and profit from these e6pected o tcomes. P(/: 267 C/6: Technical analysis is appealin" d e the fact a tradin" system can !e developed $ith a set of r les to tri""er ! y and sell orders. There is also a $ide ran"e of indicators for a trader to choose from, allo$in" the trader to set p an analysis system to fit his tradin" style. The ne"atives of technical analysis are sin" historical data to predict the f t re 44 $hich doesnCt al$ays $or# 44 and the very lar"e n m!er of conf sin" si"nals the different technical tools can "enerate. F ndamental analysis is more dependent on a traderCs j d"ment concernin" a companyCs financial data. & trader sin" f ndamental analysis can "et everythin" ri"ht a!o t a company and stoc# and still see the stoc# "o in the $ron" direction. F ndamental analysis is favored for lon"er time frames, $hile technical analysis is considered the !etter style for short4term tradin". C/&'06063 B/%; S%98#:

Stoc# traders sho ld !e a$are of the other analysis style, even as they choose f ndamental or technical analysis for their tradin". The f ndamental analysis trader can se some stoc# chart indicators to determine a "ood entry time or price for a stoc# his f ndamental analysis has sho$n to !e a "ood ! y. The technical analyst can maintain a$areness of the f ndamental factors $hich may affect a stoc# price in a manner different than $hat the technical are predictin".

P/(%</80/ M2623#&#6% - T#1;60128 B:. F5672&#6%28 A6289:0: There are t$o schools of tho "ht a!o t ho$ a stoc# $ill !ehave relative to the mar#et, and li#e any investment strate"y or philosophy, !oth have their advocates and adversaries.

Technical analysis, $hich involves detectin" patterns in sec rity prices, "oes on the ass mption that the price of a stoc# 4 li#e the price of everythin" else 4 is a matter of s pply and demand. Technical analysts, or technicians, "enerate and interpret charts of the price and vol me histories of stoc#s to predict movement in stoc# prices accordin" to perceived trends.

F ndamental analysis, $hich e6amines the earnin" potential of the company iss in" a stoc#, "oes on the ass mption that a share of o$nership of a company has an intrinsic val e that is a f nction of the nderlyin" val e of

the company as a $hole. F ndamental analysts report $hich shares are nderval ed !y the investor comm nity and $hich are overval ed, then tr st the mar#et to ma#e corrections. In the $orld of stoc# analysis, f ndamental and technical analysis are on completely opposite sides of the spectr m. 'arnin"s, e6penses, assets and lia!ilities are all important characteristics to f ndamental analysts, $hereas technical analysts co ld not care less a!o t these n m!ers. Bhich strate"y $or#s !est is al$ays de!ated, and many vol mes of te6t!oo#s have !een $ritten on !oth of these methods. BeCll disc ss each in t rn.

P/(%</80/ M2623#&#6% - T#1;60128 A6289:0:


Technical analysis is all about trends. Before reading on, we strongly recommend a review of the Technical Analysis tutorial for a quick primer: ere is a simplified chart showing the movement of a stock price over 1! months, as well as a trend line:

T(#67: Fi" re 89.9 is not intended to !e a partic larly sef l chart for analytical p rposesE ho$ever, it demonstrates $hat a trend line loo#s li#e a"ainst the day4to4day chan"es in a stoc# price. Specifically, it sho$s a do$ntrendE if the stoc# had started the period at O8? then risen to O99, it $o ld sho$ an ptrend. (ne reason the trend line a!ove is not especially sef l from an analytical

standpoint is that it is simply a linear, strai"ht4arro$ ! llet path. In technical analysis, trend lines have to !e far s !tler than that. Technical analysis searches not only for trends, ! t also for reversals of trends. /earn ho$ to reco"niDe the direction of the mar#et $ithin the article Short), *ntermediate) and +ong)Term Trends! )sin" a polynomial trend c rve, a technician may see a different pattern emer"e, as sho$n on Fi" re :H

Saucer "s you can see above, the data line is e#actly the same, but at this point a technician might see a saucer shape, which suggests a trend reversal. " saucer bottom indicates the stock price has reached its support level, the lowest price at which it is likely to trade, and it has nowhere to go but up. " saucer top signals e#actly the opposite: the stock has reached its resistance level, the highest price at which it is likely to trade. The band between the support and resistance levels is called the trading channel. Head and Shoulders "nother sign of a trend reversal is the head$and$shoulders pattern:

Yo do not need a trend line for thisH the data line tells the story. The stoc# price "lided p ntil it formed its first sho lder in May 9AA8, then it dropped offE then it s r"ed to form a hi"her pea# 4 its head 4 in %ecem!er. It then fell off a"ain and s r"ed one more time 4 $ea#ly 4 to form the second sho lder in March 9AA9.

Technicians consider this a !earish chart. &n inverted head4and4sho lders $o ld !e ! llish. Ta#e a closer loo# at the head and sho lders pattern, ho$ to spot it and $hen to ! y in the article &rice &atterns ) &art ,.

Breakout Technicians have an old saying: %The trend is your friend $ &til it comes to an end.% That end is signaled by a breakout, which happens when a stock penetrates through a support or resistance level. 'f a stock price breaks out through a resistance level and is accompanied by higher$than$ usual trading volumes, technicians consider this a bullish indicator. 't means, according to technical analysis, that the stock is now looking for a new resistance level, and it may be able to continue climbing on momentum for quite some time. Moving Average (ne other type of trend line that technicians consider is the moving average, which shows changes in the average share price over a given period. Technicians believe that a stock price is likely to regress back to that average $ good news to anyone who bought the stock below that line:

In this e6ample, anyone $ho !o "ht the stoc# in - ly 9AA8, $hen it $as tradin" !elo$ its fo r4month movin" avera"e, $o ld have !een amply re$arded later on. A115&582%0/6@D0:%(0'5%0/6 L06# Stoc# price is j st one component of technical analysis. Vol me is also important

!eca se, accordin" to technicians, chan"es in vol me precede chan"es in price. ,i"ht !efore a stoc# price "ains, there may !e a period of increased vol me. (ne #ey vol me indicator is the acc m lationMdistri! tion line, $hich identifies diver"ences !et$een stoc# price and vol me flo$.

If the price is declinin" ! t the vol me is increasin", it is a ! llish si"n. Bhen price "ains $hile vol mes decrease, it is !earish.

OB#('/53;% 267 OB#(:/87 Technical analysis is as m ch an art as a science. Sometimes a stoc# $ill !e tradin" hi"her than technicians can acco nt for sin" their price and vol me charts. They $ill then call the stoc# Iover!o "htI rather than say IICm $ron".I The theory is that if all investors $ho $ant to ! y the stoc# have already !o "ht it, then there are only sellers left in the mar#et, and so the price m st drop. Similarly, a stoc# that is tradin" lo$er than can !e acco nted for !y technical analysis is said to !e oversold and is e6pected to rise in price.

P/(%</80/ M2623#&#6% - F5672&#6%28 A6289:0: F ndamental analysis is a very different approach. The analysts in yo r !ro#er4 dealerCs e7 ity research department rely more on 7 arterly and ann al reports provided !y companies. Be recommend the Fundamental Analysis t torial for those $ho are ne$ to f ndamental analysis, or need a refresherH

K#9 F06261028 S%2%#&#6%: &nn al and 7 arterly reports contain t$o #ey financial statementsH
8.

Balance sheetH It sho$s assets, or $hat a company o$ns, and lia!ilities, or $hat it o$es. The amo nt !y $hich assets e6ceed lia!ilities is called shareholdersC e7 ity. & !alance sheet is a snapshot of the companyCs solvency as of a "iven date, s ally the last date in the fiscal 7 arter.

9.

Income statementH It sho$s reven e, or the money comin" in, and e6penses, or the money "oin" o t. The amo nt !y $hich income e6ceeds e6penses is called earnin"s. +enerally, e6penses related to costs of "oods sold and to sellin", "eneral and administrative p rposes are s !tracted from reven e first. The res lt is earnin"s !efore interest and ta6es ('BIT). Then interest e6pense is ta#en o t and the res lt is earnin"s !efore ta6es ('BT). Then ta6 e6pense is ta#en o t and $hat is left is net profit, $hich can !e distri! ted to shareholders as dividends or reinvested in the ! siness. &n income statement reflects a companyCs earnin"s for a period of time 4 every three months for all ).S.4head7 artered companies.

11. FUNDAMENTAL

OR TECHNICAL ANALYSIS IN DAY

TRADIN!:
Bhen day tradin", a trader ma#es the decision a!o t $hat to trade, $hen to trade, and ho$ to trade, sin" either f ndamental or technical analysis. Both forms of analysis involve loo#in" at the availa!le information and ma#in" a decision a!o t the f t re price of the mar#et !ein" traded, ! t the information that is sed is completely different. Is it possi!le to se !oth f ndamental and technical analysis to"ether, ! t it is more common for a trader to choose one or the other. F5672&#6%28 A6289:0: F ndamental traders se information a!o t the "lo!al and national economies, and the financial state of the companies involved, as $ell as non financial information s ch as c rrent political and $eather information. F ndamental traders !elieve that the mar#ets $ill react to events in certain $ays and that they can predict f t re mar#et prices !ased on these events. For e6ample, if a company receives re" latory approval for a ne$ prod ct, a f ndamental trader mi"ht e6pect the companyCs stoc# price to rise. 2onversely, if a company has a financial scandal, a f ndamental trader mi"ht e6pect its stoc# price to fall. F ndamental traders need access to all of the availa!le information as soon as it is availa!le, and are therefore often instit tional traders $ith lar"e s pport teams, rather than individ als. F ndamental analysis has pro!a!ly !een in se since there $ere mar#ets to trade, and has traditionally !een done man ally, ! t as comp tin" po$er increases it has !ecome possi!le for some f ndamental information to !e processed a tomatically.

T#1;60128 A6289:0: Technical traders se tradin" information (s ch as previo s prices and tradin" vol me) alon" $ith mathematical indicators to ma#e their tradin" decisions. This information is s ally displayed on a "raphical chart and is pdated in real time thro "ho t the tradin" day. Technical traders !elieve that all of the information a!o t a mar#et is already incl ded in the price movement, so they do not need any other f ndamental information (s ch as earnin"s reports). There are many different types of charts and many different mathematical indicators. Some indicators are !etter s ited to short term tradin", and others are !etter s ited for lon"er term trend follo$in" tradin". Individ al traders are s ally technical traders. Technical analysis appears to have !een sed at least 9AA years a"o in -apan. Modern technical analysis is s ally performed !y the trader interpretin" their charts, ! t can j st as easily !e a tomated !eca se it is mathematical. Some traders prefer a tomatic analysis !eca se it removes the emotional component from their tradin", and allo$s them to ta#e trades !ased p rely on the tradin" si"nals.

F5672&#6%28 A6289:0: B: T#1;60128 A6289:0: In analyDin" price action, fore6 traders ma#e se of t$o main #inds of analysis. Those $ho concentrate on price action, and i"nore most other factors choose to direct their efforts at perfectin" their s#ills at technical analysis, $hile traders $ho prefer to st dy the economic events that ca se the mar#et action mostly foc s their efforts in st dyin" f ndamental analysis. In this article $eQll ta#e a !rief loo# at !oth of these concepts, !efore movin" onto e6amine them in "reater detail in f rther lessons of o r school.

Many traders com!ine the information provided !y these t$o types of analysis to "enerate tradin" si"nals. (thers concentrate on one aspect of analysis and e6cl de the other from their calc lations, and it is fair to say that either approach can !e valid dependin" on the circ mstances. There are traders s ch as Martin Sch$artD $ho ac7 ired rep tation and $ealth !y tradin" on the !asis of technical analysis, alon" $ith those li#e -im ,o"ers $hose s ccess $as !ased on f ndamental analysis almost e6cl sively. B t $hile they $o ld disa"ree on many s !jects, !oth of these people $o ld pro!a!ly a"ree that emotional control and discipline are the most important aspects of a s ccessf l tradin" career, even !efore analytical pro$ess. H/= D0<<#(#6% 2(# F5672&#6%28 267 T#1;60128 A6289:0:C Be sho ld note here, !efore "oin" on $ith o r disc ssion of the vario s aspects of the t$o analytical schools, that $hile the e6planations of the f ndamental and technical analyst on a phenomenon may differ from each other, the end res lt, and the trade recommendation can in many cases !e the same. To "ive an e6ample of this, $e may e6amine the classical case of a para!olic price "raphic $hich $o ld ma#e !oth #inds of analysts ca tio s, ! t for different reasons. The technical analyst $o ld loo# at his charts, notice the e6treme val es re"istered on the indicators, and $o ld ca tion a"ainst joinin" a trend that is in dan"er of s fferin" a sharp reversal as the inevita!le co ntertrend movement occ rs. The f ndamental analyst $o ld loo# at the e phoria in ne$s so rces and analyst comm nity, consider the declarations of "overnment a thorities and important persona"es, and $o ld pro!a!ly "ive the same $arnin". Bhile the tools and indicators sed !y these t$o individ als are different, their actions often coincide $ith each other.

F ndamental and technical analysis are not e6actly the same thin", and at least in the lon"er term, the predictive po$er of f ndamental st dies is almost certainly "reater. *onetheless, these t$o are a#in to t$o different lan" a"es descri!in" the same phenomenon, and at least on hindsi"ht, they al$ays sho$ the same direction, and reach the same concl sions. /etQs ta#e a !rief loo# at these t$o schools. *;2% 0: F5672&#6%28 A6289:0: F ndamental analysis is the discipline that tries to ma#e sense of price movements in li"ht of economic data and ne$s flo$. In comparison to technical st dies, f ndamental analysis has a lar"er selection of indicators. Bhile many traders choose to foc s on the ne$s releases and indicators that appear to determine the day4to4day movements in the financial mar#ets, f ndamental analysis in fact st dies many other aspects of economics incl din" politics, financial la$, social attit des, in addition to the many other aspects of h man life. F ndamental analysis aims to esta!lish a ca se and effect relationship !et$een mar#et movements and economic developments. In that sense, it is different from technical analysis $hich re"ards the price action as the !e"innin" and end of tradin". Bhile technical analysts "enerally ar" e that the price action reflects all information availa!le to the mar#et, f ndamental analysts see# to identify im!alances and RerrorsS in the mar#et that may offer profit opport nities. )nli#e the technical trader, the f ndamental trader is al$ays s#eptical of the price action, and see#s alternative e6planations to the R$isdom of the mar#etS in eval atin" price trends.

Bhile this type of analysis has !een proven to !e efficient and relia!le thro "h the a"es, there are a n m!er of iss es that $e m st #eep in mind in order to avoid !ein" too optimistic a!o t the predictive po$ers of o r approach. Bhile f ndamental analysis can and often does indeed $arn s on possi!le errors in mar#et attit des to economic realities, thereQs no indication that the correction $ill happen anytime soon. Similarly, ! !!les and mar#et e6tremes often ca se analysts to rationaliDe the nhealthy positionin" of the mar#et, invalidatin" the healthy advanta"e of s#epticism inherent in the f ndamental approach.

A7B26%23#: /< F5672&#6%28 A6289:0: The "reatest !enefit derived from st dy of f ndamental analysis is the a!ility to nderstand the ca ses that drive the mar#et action. By nderstandin" mar#et dynamics, $e can !e confident in maintainin" a position as lon" as the ca se that tri""ered the trade e6ists. & thoro "h "rasp of f ndamental analysis also ens res that $e do not lose o r compos re in the face of mar#et volatility. Those $ho employ f ndamental st dies in "a "in" the price action are confident that they are on the trac#s of the "reatest "eni ses of fore6 tradin". &ll those $ho s ccessf lly made millions or !illions in this ! siness $ere sers of f ndamental analysisE and there is no reason to do !t that if $e $ere to se the same methods $e can achieve the similar, if not the same res lts $ith them. *;2% 0: T#1;60128 A6289:0:C )nli#e f ndamental analysis, technical analysis is a relatively ne$ discipline that is still !ein" perfected !y its practitioners. Still, years of contin ed se has made it an insepara!le part of the traders arsenalH technical st dies are pro!a!ly the only tools

sed for determinin" entry or e6it points, and in short term tradin", technical analysis is pro!a!ly the only analytical tool that has any predictive po$er. Technical analysis is !ased on three important ass mptions a!o t mar#et events. First, technical analysis posits that the prices disco nt all information availa!le to the p !lic. Secondly, it ass mes that price movements are not random, and that technical tools can !e sed to esta!lish the nderlyin" c rrents !ehind the price action. Third, it claims that price trends tend to repeat themselves. In other $ords, past developments provide some " idance on the direction and ma"nit de of f t re price action. In conse7 ence of these three ass mptions, technical analysis re"ards the price action as the conscio s activity of a mass of financial actors $ho act collectively as if they $ere one lar"e sentient !ein" $ith emotions and feelin"s. In other $ords, j st li#e the case $ith a !eehive, or an ant layer, the seemin"ly independent actions of individ al traders are tar"eted to$ard achievin" the most sensi!le and lo"ical co rse for prices in "eneral. *at rally, if collective $ill of traders is rational and ma#es meanin"f l decisions, then the f t re choices of that !ody $o ld depend on its past actions. &nd if s ch a lo"ical coherence, and a train of reasonin" !et$een past and present e6ists, it $o ld !e possi!le to e6amine and nderstand the r les !ehind that train of reasonin", and conse7 ently to follo$ it and to profit as a res lt. &nd there lies the !asis of technical analysis. - st as $e ded ce that a person $ho ta#es o t #eys from his poc#ets is intent on openin" the door, $e e6pect that a certain spi#e or collapse in prices, a period of trendin" activity, or consolidation m st lead to their lo"ical concl sion in the mar#ets in !rea#o ts, or s ccessive hi"hs or lo$s, the nat re of $hich is determined !y technical analysis.

A7B26%23#: /< T#1;60128 A6289:0: Technical analysis is simple and strai"htfor$ard, $ith tools availa!le to every one from the seasoned hed"e f nd mana"er, to the novice retail trader. In addition, technical tools are easier to interpret than f ndamental indicators, the nderstandin" of $hich s ally re7 ires a period of dili"ent st dy. Finally, since technical analysis foc ses on the price action e6cl sively, the technical trader has only one needle in his compassH the price, on $hich any calc lation a!o t profits or losses m st !e !ased. Technical st dies have !een refined and perfected over the years, and !y sin" them $e are ma#in" se of the herita"e of tho sands of e6perienced and #no$led"ea!le traders $ho have contri! ted to the effort. By masterin" the vario s aspects of technical tradin", $e can also minimiDe the role of " ess$or# and conject res in analyDin" the price action. Bhile technical st dies can "ive conflictin" si"nals a!o t the f t re, the error, if any, is on the part of the interpreter. By reco"niDin" o r fla$s, $e can !etter o r analytical s#ills, and $ith !etter s#ills, $ealth and s ccess $ill !e j st a sin"le !lin# a$ay.

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In concl sion, t rn over to '7 ity ratio and +ross 0rofit ratios are "ood startin"
points for !e"inners in F ndamental &nalysis. Slo$ly yo can add other factors, as disc ssed a!ove. (f co rse, this entire disc ssion is strictly for a !e"inner. If yo are a seasoned investor in sin" F ndamental &nalysis, $hy donQt yo share yo r ideasJ Both types of analysis are sef l for e6aminin" mar#et action. Yo r tradin" style, and attit de to tradin" $ill determine $hich #ind of analysis yo $ill find most !eneficial. B t !efore ma#in" that decision, it is a "ood idea to st dy the s !ject of analysis in sli"htly "reater detail. F ndamental analysis can !e val a!le, ! t it sho ld !e approached $ith ca tion. If yo are readin" research $ritten !y a sell4side analyst, it is important to !e familiar $ith the analyst !ehind the report. Be all have personal !iases, and every analyst has some sort of !ias. There is nothin" $ron" $ith this, and the research can still !e of "reat val e. /earn $hat the ratin"s mean and the trac# record of an analyst !efore j mpin" off the deep end. 2orporate statements and press releases offer "ood information, ! t they sho ld !e read $ith a healthy de"ree of s#epticism to separate the facts from the spin. 0ress releases donCt happen !y accidentE they are an important 0, tool for companies. Investors sho ld !ecome s#illed readers to $eed o t the important information and i"nore the hype. Technical analysts consider the mar#et to !e ?AP psycholo"ical and 9AP lo"ical. F ndamental analysts consider the mar#et to !e 9AP psycholo"ical and ?AP lo"ical. 0sycholo"ical or lo"ical may !e open for de!ate, ! t there is no 7 estionin" the c rrent price of a sec rity. &fter all, it is availa!le for all to see and

no!ody do !ts its le"itimacy. The price set !y the mar#et reflects the s m #no$led"e of all participants, and $e are not dealin" $ith li"ht$ei"hts here. These participants have considered (disco nted) everythin" nder the s n and settled on a price to ! y or sell. These are the forces of s pply and demand at $or#. By e6aminin" price action to determine $hich force is prevailin", technical analysis foc ses directly on the !ottom lineH

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