I had mentioned ‘Technical analysis’ (and my ignorance about it) in my previous post and had promised to do some reading and get back on the topic in my next post.
Today, I’m happy that I finally could comprehend the funda in my very first attempt, and sad to think that I couldn’t grasp it during college, in spite of reading multiple times, from multiple books, sitting in multiple locations, both with and without my spectacles.
But before we jump into the meaning, let’s understand the context.
If you had Rs.10000 to invest in shares and more than 6000 stocks to choose from, how would you go about it? Let’s look at certain thoughts that would hover while you try to make the right decision –
• Why am I looking at this option?
• What is the kind of growth in value I am looking at?
• Am I interested in short term or long term investment in shares?
• Do I have the time or patience for day trading?
• Do I want the facility of ‘no tax on long term capital gains’?
• Am I going to keep in pace with the news that affect my stocks?
A person who has no clue as to what is happening in the economy/market/country/world would want to take a look at it before he looks at his investment options. From what I found, literally everything around us has an implication in the stock market. So, keeping oneself reasonably in pace with it becomes necessary for making the right choices.
From an economy point of view, taking a look at indices like –
· growth rate – will tell us whether there is optimism and opportunity in the economy
· gdp – can tell us what the percentage of income contributed by each sector of our economy is
· inflation rate – tells us how high the money supply in the economy is
similarly, bank rates, interest rates etc.
From a political point of view, budget allocations, government policies, coalitions, foreign policy, support to industry etc.
From an industry point of view, supply and demand levels, tax benefits, raw materials and work force supply, performance of related industries, etc.
From a company point of view, financial position, competitors, marketing strategies, funds available, staff motivation, performance etc.
Once you have a decent idea about these, you will be in a position to ‘relate’. When it comes to economy and investments, it is very important to be able to relate data to deduce informed opinions. ‘To relate’ would mean – to make out what pattern/news around the globe, in the economy, government, industry, competitor or people can affect a given stock. This is called fundamental analysis.
While many people think that fundamental analysis is sufficient to find out if a stock is worth buying, there is another school of thought that believes that whatever conclusion one has made out of a fundamental analysis is already reflected in the price of stock. This school of thought proposes to consider the actual price behaviour of the stock. That is, no matter how many highs and lows a stock price has, it will still follow a particular trend; and this trend helps determine whether the stock will do well in the future. This is called technical analysis.
Still confused? I guess this chart will make it clearer –
While the small dips and rises represent the stock price’s reaction to market news, the overall trend which is in an upward direction, shows that the stock is bound to do well and people would want to buy more shares of this company. The time period on the x axis of the graph can be minutes, hours, days or even years.
While some analysts use technical methods to make decisions others depend on economic factors only; still others use a combination of both.