Lesson 2: Introduction to Technical and Fundamental Analysis
How do you use these techniques?
First you'll look at what you can learn from the charts. Technical analysts believe that all information about earnings, dividends, and the future performance of a stock is reflected in the company's past market prices.
Therefore, charts showing these prices and the volume of trading already comprise all the fundamental information an analyst can hope to know. A stock's price tends to move in trends. A stock whose price is on the rise will keep rising, and one that is falling, will keep falling until it reaches a new support level. When you look at stock charts on Yahoo! Finance, or any of the other sites in this week's field trip, you will see a way to view the 50-day and 200-day moving average. These averages are considered support levels.
When a stock drops below both these levels, as many did during the recent correction, technical analysts will wait for what they call a "bounce" to determine the next support level. This is where a stock holds its price and doesn't go lower. When a stock does not fall below the lowest level, but bounces back and stays up, a new support level has been established for a while. This week's reading assignment will delve deeper into this technique.
For the fundamental analyst, the most important thing to determine is an estimate of the firm's future stream of earnings and dividends. The analysts look at sales levels, operating costs, corporate tax rates, depreciation policies, and sources and costs of capital requirements. After studying the past record of the company and a review of the company's investment plans, fundamental analysts will frequently visit the company to get a firsthand view of the future from the management team.
In addition, the analyst will look at the economic conditions influencing the industry that the company is in. They will also examine how the company's fundamentals compare with others in that industry. This week's reading assignment will further explain the pros and cons of fundamental analysis and the field trip will guide you to good sites for gathering fundamental information about a stock.
