Introduction to investment analysis
Fundamental and technical analysis techniques to help you second guess the financial markets.
This type of investment analysis is generally used for a long-term approach to investing and involves an assessment of:
- Company statistics and news
- Global/political events
- Economic data such as gross domestic product (GDP) and employment
Aims of fundamental analysis
1. Establish the intrinsic or fundamental value of a company or the broader market, by calculating and interpreting a wide range of yields and ratios, based on factors such as earnings and asset values.
2. Judge whether a share or market is correctly valued by employing discounted cash flow techniques.
3. Establish correlations between a range of variables and asset returns using quantitative techniques.
4. Analyse the trade-off between risk and reward for different asset classes.
Company analysis focuses on financial information within income statements, balance sheets and cash flow statements. Profitability, gearing, liquidity/solvency and operational efficiency are analysed using accounting ratio analysis, and there are six key ratios which are particularly useful when deciding whether to invest in a company. Just remember that past performance might not give an indication of future performance.
Technical analysis (charting)
This type of investment analysis is the study of past price movements, short-term timing, trends and price patterns, to help predict future market direction. There are many ways to display and analyse price movements through charting, and many technical studies, including mathematical calculations and discretionary tools can be used.