Fundamental Stock Analysis Versus Technical Stock Analysis
The computerized financial data industry has become a $4 billion business since the first computers showed up on brokers' desks in the 1970s. Today, dozens of online services are available that can overload a hard disk with megabytes of data in a flash, but comprehension or understanding do not come with all that data. Burton G. Malkiel, in his A Random Walk Down Wall Street, explains:
A random walk is one in which future steps or directions cannot be predicted on the basis of past actions. When the term is applied to the stock market, it means that short-run changes in stock prices cannot be predicted. Investment advisory services, earnings predictions and complicated chart patterns are useless (Malkiel, 1996, 24).
In other words, if one is going to invest in the market, it's up to that person to learn how to make sense of the wide variety of information available to the novice investor. It is that challenge that structures this paper. Part I, Definitions, will specify the differences between the two broad kinds of financial analysis B fundamental and technical. Part II, Applications, will describe some of the better-known technical analysis tools. Part III, Dialogues, will describe the key points of the opinions that Fundamentalists hold about Chartists, and vice-versa. Part IV, Conclusions, will consider suggestions for change.
Fundamental analysis of a stock involves determining the value of a stock by studying elements about the company that issues the stock (Sharpe, Alexander, & Bailey, 1995, 831). The fundamentalist studies such things as earnings, dividends, balance sheet variables and footnotes, and the quality of management. They try to use this information to make qualified and educated guesses about the true value of a stock. When the market price deviates from this true value figure, the fundamentalist takes advantage of this deviation ...