There has been suggestion that securities with stronger earnings and more attractive features and which are issued by companies operating in stable or growing industries should command higher prices than securities with weaker earnings and other less attractive features. But this GREATLY oversimplifies matters. Many additional, continuously changing factors are at work to change securities prices in general and prices of various types and groups of securities in particular. "We" can group these additional price-determinants into 2 categories : Fundamental and Technical Analysis.
1) Fundamental Analysis
The concept of F.A. is very broad. The short, medium and long-range prospects of different industries, the outlook for the national economy and for the economies of countries with which we trade, interest levels, capital market conditions and a host of statistical series are studied to shed light on securities prices. In fact, F.A. studies EVERYTHING and ANYTHING outside the securities markets in order to determine how securities prices will change.
By far the most important single factor affecting the price of a corporate security is THE ACTUAL OR EXPECTED PROFITABILITY OF THE ISSUER ( See my other posting about valuing penny stocks ). Are profits sufficient to service debt; to pay current dividend; and to pay increasingly larger dividends? Therefore, the F.A. approach studies studies such items as a company's interest, asset and dividend coverage; it's debt-equity ratio; profit margins; dividend payout; earnings per share (EPS); sales penetration; market share; product or marketing innovation and MOST IMPORTANTLY....the quality of management!!!
2) Technical Analysis
T.A. view the range of data studied by F.A. as too massive and unmanageable to pinpoint security price movements with any real precision. Instead, they focus on the stock market itself. They study and plot on charts the past and present movement of stock prices, the volume of trading, the number of stocks advancing and declining. They try to predict patterns that can be used to predict future price movements ( This is TRULEY an art form )
In the course of their studies, technicians attempt to probe the psychology of investors collectively or, in other words, the "mood" of the market. Price and volume figures and their patterns of change are said to help answer such question as:
* Why does a stock, which has had no basic change in it's F.A., trade at 18x earnings at one time and 7x earnings at another?
* Why is market volume so volatile?
* Why is a stock's price limited within an apparent high and low? And what, on occasion, causes the price to break out of such a range?
F.A. and T.A. seek the same thing: to predict price movements using historical data. But the F.A. approach looks at the economy, the industry, the company, while the T.A. approach looks at stock prices, trading volumes and other market data. Being based on historical data, both are fallible. But both offer clues to the future and support each other.
There you have it class..... a very basis intro into the CRAZY world of ANALYSIS!!! ( remember....what's the KEY word found within ANALYSIS?)
YUP!!!! The Guru's that follow these practices could turn a piece of coal into a diamond.
This article was written by Placer_foot members of StockHideout
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