Stock Market Analysis
The investor aims to maximize profit through his investment decisions and strategies. Before taking the final decision on the strategy to follow, he undergoes a stock market analysis and evaluates the state of the financial markets in order to assess the conditions prevailing in the market and to identify the trends and the path that the securities will follow. There are two main ways of market analysis.
- Fundamental analysis strategies
- Technical analysis
- Efficient Market Theory
Fundamental and Technical Analysis are two completely different ways of analysis, but one can say that one complements the other, in order to make the right investment decisions. Fundamental Analysis is based on the study of the company and its external and internal environment. In contrast, Technical Analysis is based on studying financial market conditions and the relationships that grow there. Usually, the analyst prefers one method of analysis, but this does not mean that he cannot use both together. There are several ways where finally the two analyzes can be used simultaneously.
Fundamental Analysis is the most accepted by the scientific community method of stock selection and evaluation based on the study of the general situation of the economy of a country, the sector and the economy, the financial crisis (balance sheets), and the management of a company, i.e. all the fundamentals that affect the company (Cutler, Poterba & Summers 1989).
Through Fundamental Analysis, analysts try to determine the factors that affect the market at any given time. So they can assess the future course of the market and then make appropriate investment decisions. Proponents of this method argue that it is the most appropriate way to predict future developments.
What Analysts examine in detail:
The economic climate in which the company operates (eg interest rates, inflation, Productivity Indicators, GDP, Unemployment, Public Debt Progress). What are all those macroeconomic figures and factors that directly or indirectly affect the course of the markets?
The production sector or the company’s activities (e.g. Construction sector, the size of the industry, the company’s market share). The figures (accounting statements) and other elements (e.g. the company’s investments). That is to say, an evaluation of the company is carried out, where its liquidity, growth rate, the evolution of economic figures, the course of the stock, marketability, and even its management are examined company. The objective of Fundamental Analysis is to determine the intrinsic. I.e. the real, value of a stock, so that the investor can assess the growth prospects and profitability of a business and predict its future course, i.e. the future share price. A key assumption of fundamental analysis is that a stock’s stock price does not fully reflect its “true” value.
Therefore there are three steps of Fundamental Analysis which are:
- Finding the actual value of the stock
- Estimating future earnings based on earnings history and sales
- Comparison of personal estimates with those of the market
The analyst needs some basic tools to carry out this study, for example, the macroeconomic figures of the economy, the published company financial statements, other analyst studies, industry studies, company news, and other data. Unfortunately, Fundamental Analysis strategies require the analysis of large amounts of data and evidence. It is a particularly time-consuming process because it takes a long time to track the sizes and perform the analysis.
Technical analysis strategies
Technical Analysis makes its appearance at the beginning of the 20th century thanks to C.H. Dow, which was the founder of the first edition of the financial newspaper Wall Street Journal and begins to be accepted by a portion of scientists in the 1990s and proves to be particularly powerful in the evaluation of securities. Technical Analysis is usually preferred by fund managers and it is proven important for decisions with a short time horizon. Technical analysis, also known as chart analysis. It is considered the original method of “investment analysis” having its roots in the 1800s (Brock, Lakonishok & Lebaron, 1992).
Historical data using price and volume charts are used as a basic tool in order to predict the future prices of securities. Analysts take advantage of their special elements market to anticipate fluctuations in security prices. By technical analysis, we mean the systematic analysis of the market using various techniques and statistical analysis. Charts, in which the past securities prices and trading volume are captured, are also used aiming to predict securities prices as safely and accurately as possible.
Technical analysis is based on three basic assumptions which are as follows:
- The market discounts everything. This means that any factor affecting the formation of the market equilibrium is reflected in the price of the securities. Factors such as corporate results, news, financial figures, crises, psychological factors, political situations, etc. are “captured”, analyzed, and weighed by the market which ultimately determines the share price.
- Prices trend for some time and hold until a reversal occurs. This assumption is consistent with the dynamics of stock markets as expressed by the forces of supply and demand of securities. Usually, the accumulation phase occurs when the price of a stock is at low levels, i.e. when there is no offer of securities. Conversely, the distribution phase occurs in periods characterized by high price levels.
- It is possible to predict changes in future trends and prices based on past data and trends because market behavior repeats itself.
A key element of Technical or Stock Market Analysis is the support price and the resistance price. The support price is the point at which the stock price will start to rise after a fall. The resistance value is the price that a price will reach and then continue to fall.