Stock Market Basics to Advance - Lecture 4
Types of Analysis
In trading and investing, there are two
types of analysis can be done to analyze markets and securities: Fundamental and Technical analysis. Each
helps to evaluate investment opportunities. Main Purpose of Fundamental analysis is to check the quality of an
asset, while technical analysis decides market trends for short term view.
Will discuss the each in detail
1. Fundamental Analysis:
Purpose: Fundamental analysis primarily focuses on identifying investment opportunities based on the underlying fundamentals of the asset, with a long-term investment horizon. Fundamental analysis aims to evaluate the true value of an asset, typically a stock or a bond, by examining various qualitative and quantitative factors related to the underlying asset and its issuer. Analysis depends on Company’s performance, major news, interior and an exterior factor, affairs, deals etc.
§ Fundamental is more suitable for investing.
§ Economic reports, news events, industry statistics, Company management, company’s future investing point of view taken into consideration
§ Identification of undervalued or overvalued stock can be determined.
§ Long term position trader uses this type of analysis
Key Components:
Financial Statements: This involves analyzing balance sheets, income statements, and cash flow statements to assess the financial performance and health of the company.
Economic Indicators: Fundamental analysts look at broader economic indicators such as GDP growth, inflation rates, interest rates, and unemployment figures to understand the macroeconomic environment impacting the company.
Industry Analysis: Evaluation of industry dynamics including competition, regulatory factors, technological advancements, and market trends helps determine the company's position within its sector.
Management Quality: Assessing the competence, integrity, and strategic decisions of the company's management team, along with corporate governance practices and transparency in disclosures, is crucial.
Valuation Models: Various models such as discounted cash flow (DCF), price-to-earnings (P/E) ratio, and price-to-book (P/B) ratio are used to estimate the intrinsic value of the asset.
2. Technical Analysis:
Purpose: The primary aim of technical analysis is to identify short-term trading opportunities based on historical market data patterns and trends, with a focus on profiting from short-term price fluctuations. Technical analysis seeks to forecast future price movements of assets based on historical price and volume data, focusing on identifying patterns and trends in market data. Analysis made from studying of stock performance using charts, indicators and various tools.
§ Uses price movement patterns on charts to predict future price movement.
§ Support and Resistance, Trend Analysis, Volume analysis, Relative strength, chart pattern analysis, candlestick pattern analysis taken into considerations.
§ Swing Trader and intraday trader use this type of analysis.
§ Determines right time to buy and sell the stock.
Key Components:
Price Charts: Technical analysts use tools like trend lines, support and resistance levels, and chart patterns (e.g., head and shoulders, double tops/bottoms) to identify potential buying or selling opportunities.
Volume Analysis: Examination of trading volume patterns alongside price movements helps confirm the strength of a trend or identify potential reversals.
Market Sentiment: Consideration of market sentiment indicators such as investor sentiment surveys and put/call ratios provides insight into overall market sentiment.
Pattern Recognition: Identifying repetitive patterns in price and volume data, such as triangles, flags, and wedges, helps anticipate future price movements.
Statistical Analysis: Applying statistical methods like regression analysis and correlation analysis to market data helps derive insights into price movements.
In conclusion, while fundamental analysis evaluates the intrinsic value of an asset based on its underlying fundamentals, technical analysis focuses on predicting short-term price movements based on historical market data patterns and trends. Investors often use a combination of both approaches to make informed investment decisions.
Stock Market Basics to Advance - Lecture 4 Types of Analysis ( Fundamental & Technical), Terms like Leverage, indicator, square off, target, stop loss, volume
Basics Terms to remember
1. Leverage
Definition: Leverage in trading allows investors to control a larger position in the market with a relatively small amount of capital. While it can enhance potential returns, it also escalates the risk of significant losses.
Key Points:
Borrowed Capital: Leverage entails borrowing funds from a broker to amplify trading positions. Typically, brokers provide this loan without interest for intraday trading, enabling traders to execute larger trades with a smaller initial investment.
Auto Square Off: To manage risk, brokers may enforce time limits on leveraged positions. If traders fail to close their positions by the specified time, usually the end of the trading day, brokers may automatically close the positions, potentially incurring gains or losses.
Margin Calls: Brokers often impose margin requirements to ensure traders can cover potential losses. If losses approach a predetermined threshold, typically around 80%, brokers may issue a margin call, necessitating additional funds to maintain the position. Failure to meet this call may result in automatic position closures.
Benefits and Risks:
Potential Returns: Leverage offers the potential for enhanced profits by enabling traders to control larger positions with less capital. This can magnify gains if the market moves favorably.
Heightened Risk: Conversely, leverage significantly amplifies the risk of losses. Since traders are trading with borrowed funds, even small adverse price movements can lead to substantial losses, potentially surpassing the initial investment.
Risk Management: Traders must diligently monitor positions and ensure they maintain sufficient funds to cover potential losses. Implementing effective risk management strategies is crucial to mitigating the increased risk associated with leveraged trading.
In summary, while leverage presents opportunities for higher returns, it necessitates careful consideration and risk management. Traders should fully comprehend the risks involved and employ appropriate strategies to navigate the complexities of leveraged trading.
Example. 10 times leverage on our amount
That means, if our amount is 1000 then
1000 * 10 = 10000
(Our Amount) (Leverage) (Amount we can use)
2. Indicators :
o A group of technical indicators that traders use in order to predict the direction of market.
o Indicators can’t be fully trusted and having less accuracy.
3. Square Off :
o Exiting or closing the trade at particular point.
4. Target :
o A price which we have predicted that the stock will reach.
5. Stop Loss :
o A price limits which we can set for cutting losses.
6. Volume :
o Volume means total number of transactions.
o It is summation of persons who buy and sell the trade.
Importance of Volume:
o Up and down movement occurs in market just because of volume.
Ø If Demand = Supply then Sideways Market
Ø If Demand > Supply then Bullish Market
Ø If Demand < Supply then Bearish Market
Now let’s discuss, where we can trade?
1) Forex Market ( Foreign Exchange of Currency)
2) Crypto Currency Market ( Digital Currency)
3) Commodity Market ( Natural Resources)
4) Stock Market
In India, mostly people prefer Stock Market.
Now let’s discuss, what are the segments of stocks?
1) Cash / Equity
2) Future
3) Options
Now, will understand these segments one by one
|
EQUITY |
FUTURE |
OPTIONS |
|
You
own actual stock |
You
don’t own actual stock |
You
don’t own actual stock |
|
There
is no fixed quantity to buy |
There
is fixed lot size |
There
is fixed lot size |
|
No
time limit to keep stocks with us |
Contract of 3 Months |
It is
also contract basis of weekly or monthly |
|
Dividend
is paid to share holders |
No
dividend |
No
dividend |
|
We
have to pay full price of stocks to buy stocks |
Pay
20-30 % Margin |
We
have to pay premium price |
|
Less
risky than others |
Highly
Risky with potential of high rewards |
Less
risky than futures with limited potential reward |
Stock Market Basics to Advance - Lecture 4 Types of Analysis ( Fundamental & Technical), Terms like Leverage, indicator, square off, target, stop loss, volume
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