Fundamental and Technical Analysis - Investing Guide - The Share Centre

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Introduction to fundamental and technical analysis

Second guessing financial markets is not easy. However, when making investment decisions, there are a number of analytical techniques which can be employed, broadly:

  • Fundamental
  • Technical
  • Or a combination of the two

   Fundamental analysis  

An assessment of company news and statistics, global/political events, economic data such as GDP, employment etc - generally used for the long term approach.

This seeks to establish the intrinsic or fundamental value of a security, or of the broader market, by calculating and interpreting a wide range of yields and ratios based on factors such as earnings and asset values as well as employing discounted cash flow techniques in an attempt to judge whether the security or market is correctly valued. 

It also draws on quantitative techniques i.e. mathematical and statistical techniques that seek to establish correlations between a range of variables and asset returns as well as analyse the trade off between risk and return for different asset classes.

Yields and ratios
Analysis of shares will focus on the financial information contained within the income statement, balance sheet and cash flow statement. Ratio analysis is commonly used, albeit, it can have its limitations.  Financial statements contain historic data and past performance may give no indication of future performance. Accounting ratios can be broadly categorised under four headings, profitability, gearing, liquidity/solvency and operational efficiency (investor ratios). 

Please see six figures that can help you decide whether to buy a share for more information.

piechart   Technical analysis

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 price movements e.g. line charts, bar charts, candlestick charts, and hundreds of technical studies including mathematical calculations (moving averages etc) and discretionary tools (trends, price patterns etc)

Please see charting for further information.

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