Fundamental and Technical analysis are the two mainstream technique to analyse the worth of stocks in the equity market.
The former focusses to identify a stock’s intrinsic value. To profit, an investor purchases stock below its calculated intrinsic value, which is influenced by company’s earning, cashflow, balance sheet and future prospect. Fundamental analyst belives the market is rationale and stock market price will reflect its underlying value over a longer term.
Technical analysis is the study of stock price movement to identify a buy or sell pattern. Patterns are analyzed using statistical tool. Analyst adopting this method believes that the market is more psychological than rationale and trader applies this technique to profit from market’s volatility
Market volatility fuels trading or what I term as short term investment
The short term market is often erratic, irrational and dominated by speculation. And, over speculation builds “castle-in-the-air”, where we see stocks being purchased at unjustified high P/E or high gearing ratio. Humans “herd” behaviour and overconfidence amplifies the notion that company’s earning will always catch up with its stock over-valuation. Guess what when it doesn’t? Stock price will fall and wipe away the premium used to build the stocks unjustified price.
The long term market is more rationale as it weeds off day to day speculation and time will help to uncover the strength or weakness of the company’s performance. Refer to my previous article about stock indices capability to rise over the longer term.
If short term market is volatile, why then do we still see traders plunging in and out from the market everyday? The limited capital and endless desire for earning drives a trader to purchase low and sell high to make profit and endlessly recycling their capital to make even more profit. But, weigh in the trading fees, capital gain tax (in some countries) and the risk in short term market when deciding if trading is your cup of tea
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