Successful stock trading depends on:
• The conceptual ability of the stock trader to predict prices accurately, &
• The Practical ingenuity of the stock trader to manage risks efficiently.
Two techniques are commonly used to forecast prices in the stock market: Fundamental Analysis & Technical Analysis.
The technical analysis forecasts the direction of prices through the study of past stock market data of price and volume. The fundamental analysis determines the intrinsic or true value of the shares in the stock market.
Understanding Intrinsic Value of Stocks
If the intrinsic value is higher than the market price, it is recommended to buy the stocks. If it is equal to the market price, hold the stocks. If it is less than the market price, sell the stocks.
The fundamental analysis consists of four types of analysis:
• Economic Analysis,
• Industry Analysis,
• Company Analysis, &
• CEO/Top Management Analysis.
Investors can use these different – but to some extent complementary – methods for stock trading.
For example, a fundamental investor may use technical arguments for deciding entry and exit points. A technical investor can use fundamental arguments to limit their universe of possible stock to ‘well-performing’ companies.