Fundamental Analysis
Fundamental analysis aims to determine a company's intrinsic value by examining its financial statements, business model and competitive position. The goal is to identify whether the market price is above or below that intrinsic value.
The three key financial statements are the balance sheet (assets and liabilities), the income statement (revenue and profit), and the cash flow statement (actual cash generation). Reading all three together is essential.
Common valuation metrics: P/E ratio, P/B ratio, debt-to-equity, net profit margin and return on equity (ROE). Always benchmark these against sector peers rather than interpreting them in isolation.
Technical Analysis
Technical analysis uses historical price and volume data to forecast future price movements. The underlying assumption is that all available information is already reflected in the price, and that prices move in identifiable patterns.
Moving Averages: The 50-day and 200-day moving averages are widely used to identify trend direction. A short-term average crossing above the long-term average is often read as a buy signal (a "golden cross").
RSI (Relative Strength Index): A momentum oscillator ranging from 0 to 100. Readings above 70 suggest overbought conditions; below 30 suggest oversold.
MACD: Measures the difference between two moving averages and signals momentum shifts when it crosses its trigger line.
Reading Both Together
Fundamental analysis tells you about a company's financial health; technical analysis shows what the price chart looks like right now. Reading both gives a more complete picture of how the market is currently pricing a company relative to its underlying business.
Market prices sometimes diverge significantly from a company's financial reality. Understanding these divergences makes it easier to interpret financial news and announcements in context.