In
general, the analysis of listed company or shares can be divided into two main
stream methods. They are fundamental analysis and technical analysis.
Fundamental Analysis is a study into the fundamental or business value of a company through the
analysis of various fundamental or business factors that affect the performance
of the company's business, and subsequently calculating an intrinsic value -
value of what supposedly the company is worth as a business, to which it will
be used to measure against the share price of the company in the share market.
If the intrinsic value established
is higher than the market price, the shares of the company
are said to be undervalued, vice
versa.
Fundamental Analysis
encompasses both the quantitative
and qualitative studies into the
fundamental factors determining the intrinsic value of a company. Such analysis
will not be complete without studying the political, economic, industry,
financial, as well as operational factors that will affect the business
performance of a company.
An illustration
of an example below of how to conduct a
fundamental analysis:
Assuming Company A
operates in the cultivation and plantation of palm oil trees. The company's
business performance is therefore affected by:
I. Economic factors : the degree of how broad
economy performance in the country
or countries that the company has business interest in affects demand for the
company's products.
II. Industry factors : the degree of how
various industry-related factors pertaining to the palm oil industry that the
company operates in affect the demand, as well as pricing of the company's
products. E.g. CPO price, windfall tax,
CPO stockpile level, etc...
III.
Operational factors : operational
factors include but are not limited to the age
profile of trees, soil quality, supply of labour, climate / weather factors, operating
environment, etc. that will impact the company's business performance.
IV.
Financial factors : the degree of how
the financial performance of the business of the company affects the pricing of
the company's shares in the market. This shall include analysis of the
company's current, past, as well as potential future financial performance and financial status.
Apart from the
abovementioned factors, fundamental analysis shall also include studies into
different geopolitical factors, as
such factors shall also affect the economic environment of the country or
countries that the company operates in and hence alter its business
environment.
The second type of
analysis, Technical Analysis, is an attempt to
predict the price movement of a
company's shares based on its historical price movement, trends, or patterns. Technical analysts usually look at shares in
terms of potential monetary return, regardless of how the company's business is
doing. Technical analysts are usually traders
rather than investors, people who only look to profit from capital gains over a shorter term period, instead of a longer term
time frame and constant dividend returns that investors seek.
While there are many
theories, methods, as well as beliefs in existence within the field of
technical analysis, in general there are three major directions or trends from
which technical analysts attempt to make their money or protect their money
from:
1.
Uptrend - a strong wave of higher periodical high points and lower periodical low points, often characterized by longer period for the up trending phase and shorter period of down trending phase.
Uptrend - a strong wave of higher periodical high points and lower periodical low points, often characterized by longer period for the up trending phase and shorter period of down trending phase.
2. Downtrend - a strong wave of lower periodical low high points and lower periodical
low points, often characterized by longer period for the down trending phase
and shorter period of up trending phase.
3. Sideways - a constant wave of up and down with no clear direction, often
characterized by a mixture of higher highs and lower lows which occur
interchangeably during a period.
From the above, one
can therefore observe that fundamental
analysis in principle is depicting the state
of the valuation of a company' shares, whether it is undervalued or overvalued;
whereas technical analysis is
depicting the direction of the movement
of a company' shares, whether it is trending
up, down or sideways. In short, fundamental analysis is an indicator of buy
or sell, while technical analysis is an indicator of when to execute the buy /
sell decision, or better known as market timing.
Essentially, it is
difficult to compare the two methods to determine which is the better method to
adopt. Given different time horizon, a good fundamental analyst may outperform
a good technical analyst, vice versa. Also, it is difficult to determine the
level of knowledge of the two persons who practice the two different methods.
Two experts in the two different fields may have different levels of expertise
in their field, although both are also called experts in their fields, and it
all boils down to the level of knowledge one has pertaining to the area of
practice.
So, what this means
to a new investor or trader is that when one is practising his desired
analytical method, one should not ignore the importance of the other as well in
helping them to make better decisions. When a trader or investor is able to use both methods harmonically well in
the share market, he will be able to execute his investment or trading
decisions in a much precise manner, giving him superior return than the average
investor / trader.
