Indian stock market investing always calls for all the various tools and techniques that work so as to make effective investment decisions. Among the two highly significant approaches applied in the Indian stock market for the analysis of the stocks are technically and fundamentally. Both have their merits. Merits The merits would be adopted by the traders and investors in order to predict a price movement while determining the opportunities and later managing their risks. Though these two methods differ from each other, in reality, they can represent an even more integral analysis of market trends when applied together.
Let’s discuss the technical analysis in conjugate analysis with the fundamental of an investment and how it applies in the Indian stock market, what an investor should be doing.
What is Technical Analysis?
Technical analysis basically is the study of past market data mostly price and volume activities to forecast future price movements in a stock. These technocrats are of the opinion that the prices already include all the information needed whether it be corporate performance, industry trends or market conditions. According to technical analysts, historical price patterns tend to repeat themselves, and hence, such patterns studied might offer insights into future price behaviors.
The technique of technical analysis is vastly used for short-term horizons by traders, day traders, and swing traders who require quick turn over in the Indian market. The important concepts of technical analysis are as follows:
1. Charts and Patterns:
Technicians utilize charts to identify trends and patterns. There are many types of charts, namely, line charts, bar charts, and candlesticks, but one of the most known charting pattern is head and shoulder, double tops, and triangles; they do represent the idea about changes in price in the future.
Indicators and Oscillators:
Mathematical expressions of price and volume of stock. Some of the most common indicators include:
MA will filter price data so a trend could be analyzed.
RSI:
Measure of momentum oscillator that measures the speed, as well as the change of price movements. It is most probably overbought at an RSI level above 70; and oversold below 30.
Bollinger Bands:
Since they vary with market volatility, you will always have the idea of whether a stock falls in an overbought or an oversold state.
Support and Resistance Levels
These are price levels at which one can find a type of support to begin either buying or selling the stock. Support is the level at which the stock doesn’t even go below while resistance is the level where the stock cannot apparently rise above.
These kinds of technical analyses have gained wide popularity in India due to a growth in the retail investor base and free availability of online trading platforms along with this ever-increasing intraday trading trend. In this context, intraday traders are much more reliant on technical indicators and chart patterns for entry and exit time purely based on the intraday movement of the stock price.
What is Fundamental Analysis?
Then there is fundamental analysis, which primarily deals with the judgment of intrinsic value in light of the financial soundness, management, competitive position, and general economic factors of a given company. This is as different from technical analysis where one bases his focus on price movements. Instead, a fundamental analysis depends on the intrinsic value of the company itself, which – in essence – decides whether the stock is undervalued or overvalued from the grounds of its earning power and growth prospects.
It is widely practiced by long-term investors who are interested to know the overall company performance and about the future growth of the company rather than in price fluctuations in the short run. Major aspects included in a fundamental analysis are:
1. Financial statements Investors are going to be much more interested in the financial statements of the firm, but particularly through that income statement, balance sheet, and cash flow statement, headline numbers that are revenues, profit margins, earnings per share, return on equity, or at what level a company is profitable and relatively stable from a financial point of view.
2. P/E Price to Earnings Ratio: It is the P/E ratio forming the price of shares of a company concerning its earnings per share. High P/E would signify an overpriced stock and low P/E would be undervalued.
3. Growth Prospect While judging the long-term growth prospect of any company, an investor is aware of its long-run prospects of earning along with its market share and comparative advantages as well as industry trend. If such fantastic growth prospect continues to exist then the company would earn higher returns in the long run.
4. Macroeconomic Factors: Though in a different league yet important macroeconomic conditions the fundamental analyst would look into are interest rates, inflation, and growth in GDP. Interest and inflation are very critical to giving shape to the performance of the company-particularly in an emerging economy like India.
5. Management and Corporate Governance: Quality of the management team at the company level – track record, in particular-and corporate governance practices play a vital role in laying a right foundation towards long-term success.
An essential analysis can help the long term investor create wealth in the Indian stock market. All that is needed is knowledge of the Indian economy, which is one among the fastest in the world and immense knowledge in itself to know what business or sectors may gain a growth in the near future.
Conclusion: Technical vs. Fundamental Analysis
Of course, both give differing insights depending on the application to what an investor desires and can tolerate regarding risks. Here’s the comparison:
Attribute Technical Analysis Fundamental Analysis
Focus Price patterns and market trends Company performance, health of finances, and potential for growth
Time Horizon Minutes to weeks Months to years
Major Instruments Charts, indicators, price patterns Financial statements, P/E ratio, growth metrics
Investment Style Active Trading: Day Trading, Swing Trading Long-term Investing-Buy and Hold
Market Participants Traders and speculators Long-term investors and institutional investors
Applied by retail traders, intraday traders Used by value investors, mutual funds, and institutions
Hybrid Approach Using Technical as well as Fundamental Analysis
Although the two approaches are antithetical-technical and fundamental analyses-there is still a myriad of investors and traders in India who find an application of both useful. This way, the hybrid approach lets the investors:
1. Choose those stocks that are fundamentally strong, have sound financial statements, and good growth prospects, and then time the entry and the exit with technical analysis.
2. Risk Management: Monitor the support and resistance levels with the help of technical indicators followed by fundamental analysis so that the value proposition of the company shall be decent.
For example, in such a situation while doing the basic analysis it would have found to be an excellent quality company with very good growth of earnings and afterward, with the help of technical analysis, will time to enter into the stock when that particular stock breaks the price through some very critical resistance level.