VICTORIA INTERNATIONAL COLLEGE

INDIVIDUAL ASSIGNMENT 2
Prepared by : Gayathri a/p Vijaya
Kumar
Id No
: 3008171304
Ic No
: 940222-14-5206
Program
: Diploma in Business
Administration
Subject
: Investment Analysis
Tittle
: Fundamental and Technical
Analysis
Lecturer : Miss Anna

Define fundamental analysis and Technical analysis

Fundamental analysis is a method of evaluating a security in an attempt to measure its

intrinsic value, by examining related economic, financial and other qualitative and
quantitative factors. Fundamental analysts study anything that can affect the security's
value, including macroeconomic factors such as the overall economy and industry
conditions, and microeconomic factors such as financial conditions and company
management.
Technical analysis is a trading tool employed to evaluate securities and attempt to
forecast their future movement by analysing statistics gathered from trading activity,
such as price movement and volume. Unlike fundamental analysts who attempt to
evaluate a security's intrinsic value, technical analysts focus on charts of price
movement and various analytical tools to evaluate a security's strength or weakness
and forecast future price changes. Technical analysts believe past trading activity and
price changes of a security are better indicators of the security's likely future price
movements than the intrinsic value of the security.

Describe fundamental analysis and technical analysis

Fundamental analysis
Fundamental analysis, in accounting and finance, is the analysis of a business's financial
statements (usually to analyse the business's assets, liabilities, and earnings); health and
its competitors and markets. When applied to futures and forex, it focuses on the overall state
of the economy, and considers factors including interest rates, production, earnings,
employment, GDP, housing, manufacturing and management. When analysing a stock,
futures contract, or currency using fundamental analysis there are two basic approaches one
can use: bottom up analysis and top down analysis. The terms are used to distinguish such
analysis from other types of investment analysis, such as quantitative and technical.
Fundamental analysis is performed on historical and present data, but with the goal of making
financial forecasts. There are several possible objectives:

to conduct a company stock valuation and predict its probable price evolution;

to make a projection on its business performance;

to evaluate its management and make internal business decisions;

and/or to calculate its credit risk.

to find out the intrinsic value of the share.

Two analytic models

When the objective of the analysis is to determine what stock to buy and at what price, there are
two basic methodologies investors rely upon:
1. Fundamental analysis maintains that markets may misprice a security in the short run but
that the "correct" price will eventually be reached. Profits can be made by purchasing the
mispriced security and then waiting for the market to recognize its "mistake" and reprise
the security.
2. Technical analysis maintains that all information is reflected already in the price of
a security. Technical analysts analyse trends and believe that sentiment changes
predate and predict trend changes. Investors' emotional responses to price movements
lead to recognizable price chart patterns. Technical analysts also analyse historical
trends to predict future price movement.
Investors can use one or both of these different but complementary methods for stock picking.
For example, many fundamental investors use technical for deciding entry and exit points.
Similarly, many technical investors use fundamentals to limit their universe of possible stock to
'good' companies.
The choice of stock analysis is determined by the investor's belief in the different paradigms for
"how the stock market works". See the discussions at efficient-market hypothesis, random walk
hypothesis, capital asset pricing model, Fed model Theory of Equity Valuation, market-based
valuation, and behavioural finance for explanations of these paradigms.
Fundamental analysis includes:
1. Economic analysis
2. Industry analysis
3. Company analysis
The intrinsic value of the shares is determined based upon these three analyses. This value is
considered the true value of the share. If the intrinsic value is higher than the market price, it is
recommended to buy the share. If it is equal to market price, it is recommended to hold the
share; if it is less than the market price, then one should sell the shares.

Procedures
The analysis of a business' health starts with a financial statement analysis that
includes financial ratios. It looks at dividends paid, operating cash flow, new equity issues, and
capital financing. The earnings estimates and growth rate projections published widely
by Thomson Reuters and others can be considered either 'fundamental' (they are facts) or
'technical' (they are investor sentiment) based on your perception of their validity.
Determined growth rates (of income and cash) and risk levels (to determine the discount rate)
are used in various valuation models. The foremost is the discounted cash flow model, which
calculates the present value of the future

dividends received by the investor, along with the eventual sale price; (Gordon model)

earnings of the company;

or cash flows of the company.

The amount of debt a company possesses is also a major consideration in determining its health.
It can be quickly assessed using the debt-to-equity ratio and the current ratio (current
assets/current liabilities).
The simple model commonly used is the P/E ratio (price-to-earnings ratio). Implicit in this model
of a perpetual annuity (time value of money) is that the 'flip' of the P/E is the discount rate
appropriate to the risk of the business. The multiple accepted is adjusted for expected growth
(which is not built into the model).
Growth estimates are incorporated into the PEG ratio. Its validity depends on the length of time
analysts believe the growth will continue. IGAR models can be used to impute expected changes
in growth from current P/E and historical growth rates for the stocks relative to a comparison
index.
Computer modelling of stock prices has now replaced much of the subjective interpretation of
fundamental data (along with technical data) in the industry. Since about year 2000, with
computers now able to crunch vast amounts of data, a new career has been invented. At some
funds (called Quant Funds) the manager's decisions have been replaced by proprietary
mathematical models.

Technical analysis
In finance, technical analysis is a security analysis methodology for forecasting the direction
of prices through the study of past market data, primarily price and volume. Behavioural
economics and quantitative analysis use many of the same tools of technical analysis, which,
being an aspect of active management, stands in contradiction to much of modern portfolio
theory. The efficacy of both technical and fundamental analysis is disputed by the efficientmarket hypothesis which states that stock market prices are essentially unpredictable.

History
The principles of technical analysis are derived from hundreds of years of financial market
data. Some aspects of technical analysis began to appear in Joseph de la Vega's accounts of
the Dutch markets in the 17th century. In Asia, technical analysis is said to be a method
developed by Homma Munehisa during the early 18th century which evolved into the use of
candlestick techniques, and is today a technical analysis charting tool. In the 1920s and 1930s
Richard W. Schabacker published several books which continued the work of Charles Dow
and William Peter Hamilton in their books Stock Market Theory and Practice and Technical
Market Analysis. In 1948 Robert D. Edwards and John Magee published Technical Analysis
of Stock Trends which is widely considered to be one of the seminal works of the discipline.
It is exclusively concerned with trend analysis and chart patterns and remains in use to the

present. Early technical analysis was almost exclusively the analysis of charts, because the
processing power of computers was not available for the modern degree of statistical
analysis. Charles Dow reportedly originated a form of point and figure chart analysis.
Dow Theory is based on the collected writings of Dow Jones co-founder and Editor Charles
Dow, and inspired the use and development of modern technical analysis at the end of the
19th century. Other pioneers of analysis techniques include Ralph Nelson Elliott, William
Delbert Gann and Richard Wyckoff who developed their respective techniques in the early
20th century. More technical tools and theories have been developed and enhanced in recent
decades, with an increasing emphasis on computer-assisted techniques using specially
designed computer software.
General descriptions
Fundamental analysts examine earnings, dividends, assets, quality, ratio, new products,
research and the like. Technicians employ many methods, tools and techniques as well, one of
which is the use of charts. Using charts, technical analysts seek to identify price patterns and
market trends in financial markets and attempt to exploit those patterns.
Technicians using charts search for archetypal price chart patterns, such as the well-known
head and shoulders or double top/bottom reversal patterns, study technical indicators,
moving averages, and look for forms such as lines of support, resistance, channels, and more
obscure formations such as flags, pennants, balance days and cup and handle patterns.
Technical analysts also widely use market indicators of many sorts, some of which are
mathematical transformations of price, often including up and down volume, advance/decline
data and other inputs. These indicators are used to help assess whether an asset is trending,
and if it is, the probability of its direction and of continuation. Technicians also look for
relationships between price/volume indices and market indicators. Examples include the
moving average, relative strength index, and MACD. Other avenues of study include
correlations between changes in Options (implied volatility) and put/call ratios with price.
Also important are sentiment indicators such as Put/Call ratios, bull/bear ratios, short interest,
Implied Volatility, etc.
There are many techniques in technical analysis. Adherents of different techniques (for
example, candlestick charting, Dow theory, and Elliott wave theory) may ignore the other
approaches, yet many traders combine elements from more than one technique. Some
technical analysts use subjective judgment to decide which pattern(s) a particular instrument
reflects at a given time and what the interpretation of that pattern should be. Others employ a
strictly mechanical or systematic approach to pattern identification and interpretation.
Contrasting with technical analysis is fundamental analysis, the study of economic factors
that influence the way investors price financial markets. Technical analysis holds that prices
already reflect all the underlying fundamental factors. Uncovering the trends is what
technical indicators are designed to do, although neither technical nor fundamental indicators
are perfect. Some traders use technical or fundamental analysis exclusively, while others use
both types to make trading decisions.
Characteristic

Technical analysis employs models and trading rules based on price and volume
transformations, such as the relative strength index, moving averages, regressions, inter-market
and intra-market price correlations, business cycles, stock market cycles or, classically, through
recognition of chart patterns. Technical analysis stands in contrast to the fundamental analysis
approach to security and stock analysis. In the fundamental equation M = P/E technical analysis
is the examination of M (multiple). Multiple encompasses the psychology generally abounding,
i.e. the extent of willingness to buy/sell. Also in M is the ability to pay as, for instance, a spent-out
bull can't make the market go higher and a well-heeled bear won't. Technical analysis analyses
price, volume, psychology, money flow and other market information, whereas fundamental
analysis looks at the facts of the company, market, currency or commodity. Most large brokerage,
trading group, or financial institutions will typically have both a technical analysis and
fundamental analysis team. Technical analysis is widely used among traders and financial
professionals and is very often used by active day traders, market makers and pit traders. In the
1960s and 1970s it was widely dismissed by academics. In a recent review, Irwin and Park
reported that 56 of 95 modern studies found that it produces positive results but noted that many
of the positive results were rendered dubious by issues such as data snooping, so that the
evidence in support of technical analysis was inconclusive; it is still considered by many
academics to be pseudoscience. Actually, Meteorology. Academics such as Eugene Fama say
the evidence for technical analysis is sparse and is inconsistent with the weak form of the
efficient-market hypothesis. Users hold that even if technical analysis cannot predict the future, it
helps to identify trends, tendencies, and trading opportunities.
In the foreign exchange markets, its use may be more widespread than fundamental
analysis.This does not mean technical analysis is more applicable to foreign markets, but that
technical analysis is more recognized as to its efficacy there than elsewhere. While some
isolated studies have indicated that technical trading rules might lead to consistent returns in the
period prior to 1987, most academic work has focused on the nature of the anomalous position
of the foreign exchange market. It is speculated that this anomaly is due to central bank
intervention, which obviously technical analysis is not designed to predict. Recent research
suggests that combining various trading signals into a Combined Signal Approach may be able
to increase profitability and reduce dependence on any single rule.
Industry

The industry is globally represented by the International Federation of Technical Analysts

(IFTA), which is a federation of regional and national organizations . In the United States, the
industry is represented by both the Market Technicians Association (MTA) and the American
Association of Professional Technical Analysts (AAPTA). The United States is also
represented by the Technical Security Analysts Association of San Francisco (TSAASF). In
the United Kingdom, the industry is represented by the Society of Technical Analysts (STA).
In Canada the industry is represented by the Canadian Society of Technical Analysts. In
Australia, the industry is represented by the Australian Technical Analysts Association
(ATAA),(which is affiliated to IFTA) and the Australian Professional Technical Analysts
(APTA) Inc.
Professional technical analysis societies have worked on creating a body of knowledge that
describes the field of Technical Analysis. A body of knowledge is central to the field as a way
of defining how and why technical analysis may work. It can then be used by academia, as
well as regulatory bodies, in developing proper research and standards for the field.
The Market Technicians Association (MTA) has published a body of knowledge, which is the
structure for the MTA's Chartered Market Technician (CMT) exam.