An essential component of investment research involves analyzing information with either fundamental or technical analysis to arrive at a better understanding of the market. Once the analysis is accomplished, the investor should have enough practical information to go ahead with the application of investment research. In other words, the investor will then be ready to use the information toward investing.
In technical analysis, the analyst uses stock prices at face value to identify trends in the market and invests according to these identified trends. The fundamental analyst looks to buy stocks that appear to be undervalued, assuming that the potential of these assets will eventually be realized by the market. Technical analysis may be the more popular of the two methods, though both are sometimes used.
Fundamental Analysis Fundamental analysis is, in many ways, a more'in-depth analysis and takes much time and effort to perform. The fundamental analyst will study every facet of a company, including financial well-being, management, and organization. Determining the company's financial health will involve looking at cash flow, core earnings, income statements, and company balance sheets. Moving on, the analyst may compare the product and services of the company to those of company competitors.
In addition to these steps, the fundamental analyst will attend shareholder meetings, look at quarterly and annual reports, and talk to management and employees to learn as much as possible about a particular company. The analyst will also want to examine slated events such as new products, company growth, acquisitions, and mergers (“Fundamental Analysis,” 2012).
Some experts feel that fundamental analysis is the better method of the two because it examines specifics in a more thorough manner. This school of thought believes that when more factors are examined, the more likely it is that the investor will make profitable decisions. Fundamental analysis is approached from the top down.
Economic Health The fundamental analyst begins by examining economic health as a whole, both in the country in which the company is located and the country with which it does the majority of its business. Helpful resources for this purpose include the U.S. Federal Reserve (http://www.federalreserve.gov/ ), the European Central Bank (http://www.ecb.int/home/html/index.en.html ), and the Web portals of major banks.
The fundamental analyst looks at exchanges and indices in the investment world, for instance, Standard and Poor's and Dow Jones. These figures can indicate if the market is in an upward swing or downward dip.
Next, the fundamental analyst will look at the status of the industry connected to the stock in question. For example, if the company in question produces paint brushes, the analyst might want to consider the growth of the paint industry. Other industry aspects to consider might include bristle suppliers, for instance.
Finally, the fundamental analyst will turn an eye to the target company. Who are the individuals comprising the management team? What is their history in the industry and in the company? Is management attempting to diversify its clientele by spreading the product across several industries? This can make it easier for the company to make it through a recession. What is the public perception of the company? (“How to Do Good Investment Research,” 2012).
Annual Reports In examining a company, the fundamental analyst will also want to request an annual corporate report. In the United States, a company must produce this report, also known as the 10-K report, according to federal law, as set forth by the http://www.sec.gov/ ). The 10-K report offers a valuable source of information about a company for the fundamental analyst, including data on company structure, financial growth, and management. As well, the 10-K report will offer information related to legal or disciplinary action on behalf of or involving the company. The document must be made available upon request as part of the requirement of full disclosure of companies for potential investors.
Requesting the 10-K report is as easy as contacting the office for the company's corporate shareholders. The information will also be available online in a downloadable form. A third choice is to visit the Electronic Data Gathering, Analysis and Retrieval System (EDGAR) (http://www.sec.gov/edgar.shtml ) section of the SEC. From here, anyone may retrieve Page 19 | Top of Articledata on a company's most recent 10-K file along with any required amendments.
Companies also produce quarterly reports known as 10-Q reports. The format and retrieval system are similar to those of the 10-K report.
In Europe, annual company reports are also required and made available to the public. A list of databases for annual company reports according to country can be found at the Karen Blakeman - RBA Information Services website on the Company Financials & Annual Reports page (http://www.rba.co.uk/sources/finars.htm#Europe ). The RBA page also lists databases further down the same page where annual company reports from Asia might be retrieved.
Technical Analysis Technical analysts watch price movement and trading volume, hoping to identify patterns, known as “trends.” These trends help the analyst make predictions about how a particular stock will perform in the future. The technical analyst uses tools that attempt to measure the volatility of a stock compared to that of the general market.
Other data that is important in making a technical analysis is the performance history of a stock and price movement in relation to economic benchmarks of the past. Technical analysts keep in mind that the past does not necessarily predict the future. However, the data, taken as a whole, can suggest an estimate of how an asset might behave in the face of likely events in the future.
A technical analyst will peruse data for specific stocks, commodities, options, or mutual funds according to relevant sectors of the market or in relation to the market as a whole. The technical analyst cares little about the inner workings or long-term health of companies. The focus of these analysts is on the immediate future. The technical analyst sells a stock as soon as its performance reaches its profit potential as projected by the analysis performed (“Technical Analysis,” 2012).
External Factors Those who rely on technical analysis look at external factors that taken together offer a predictable performance trend. An expert in this type of analysis may look at how the market performed in response to past natural disasters. History and geography may be brought into play as part of the analysis. Technical analysis does not study the potential prospects of the company represented by the stock in question.
From the perspective of the technical analyst, the future growth of Page 20 | Top of Articleany company does not impact an investment decision because the asset will be traded long before such growth might occur. The focus is more on the performance of the general marketplace. The investor determines entry and exit points according to the fluctuations of the market.