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When the objective of the analysis is to determine what stock to buy and at what price, there are two basic methodologies:

1. Technical analysis

maintains that all information is reflected already in the stock price. Trends ‘are your friend’ and sentiment changes predate and predict trend changes. Investors’ emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the ‘value’ of a stock is. Their price predictions are only extrapolations from historical price patterns.



Technical analysis does not care what the ‘value’ of a stock is. Their price predictions are only extrapolations from historical price patterns. We highly recommend that you’ll learn Technical analysis here, or download the “Stockmarket - Technical analysis” app from the markets for free.

2. 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 reprice the security. This is the main methodology we’re going to study.
Investors can use any or all of these different but somewhat complementary methods for stock picking. For example many fundamental investors use technicals for deciding entry and exit points. Many technical investors use fundamentals to limit their universe of possible stock to ‘good’ companies.

Fundamental analysis includes:



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  1. Economic analysis
  2. Industry analysis
  3. Company analysis

On the basis of these three, the intrinsic value of the shares is determined. This is considered as 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, hold the share and if it is less than the market price, sell the shares.

 

Start making money! go to Lesson 1