Fundamental and Technical Analysis of Stocks - What you need to know

Eivod Desk
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Fundamental and Technical Analysis of Stocks
Fundamental and Technical Analysis of Stocks

Fundamental analysis is like peering under the hood of a company to assess its true potential. It's an investigative approach to stock valuation, considering a company's financials, industry, and overall health to determine its intrinsic value - what it's truly worth, compared to its current market price.

Key Financial Ratios and Metrics

  • Profitability: Earnings per share (EPS), price-to-earnings ratio (P/E), gross profit margin, net profit margin.
  • Efficiency: Return on equity (ROE), return on assets (ROA), inventory turnover, receivables turnover.
  • Solvency: Debt-to-equity ratio (D/E), current ratio, quick ratio, interest coverage ratio.
  • Liquidity: Current ratio, acid-test ratio (quick ratio), cash flow-to-debt ratio.

Evaluating a Company's Financial Health

  • Analyze financial statements: Look at income statements, balance sheets, and cash flow statements to understand revenue, profitability, debt levels, and cash flow.
  • Compare ratios: Compare company ratios to industry averages, historical data, and competitors to identify strengths and weaknesses.
  • Consider qualitative factors: Analyze management, competitive advantages, industry trends, and risks alongside financial data.

Sources of Company Information

  • Company websites: Investor relations section, press releases, annual reports.
  • Financial databases: Bloomberg, Reuters, Yahoo Finance.
  • Industry reports: Research reports from analysts and financial institutions.
  • Government filings: SEC filings like 10-Ks and 10-Qs.

Interpreting and Analyzing Financial Statements

  • Income statement: Understand revenue, expenses, and profitability.
  • Balance sheet: Analyze assets, liabilities, and net worth.
  • Cash flow statement: Assess cash inflows and outflows from operations, investing, and financing activities.

Using Fundamental Analysis to Identify Undervalued Stocks

  • Compare fair value to market price: Calculate intrinsic value using valuation models like discounted cash flow (DCF) and compare it to the current market price.
  • Look for discrepancies: Identify companies with strong financials, good growth prospects, and a P/E or other ratios lower than industry averages.
  • Be mindful of risks: Consider external factors like market sentiment, economic conditions, and industry risks.


Fundamental analysis is an art, not a science. Interpret data with an analytical mind and consider risks.

Don't rely solely on fundamentals. Combine with other analysis methods like technical analysis for a holistic view.

Invest for the long term. Short-term market fluctuations might not reflect a company's true value.

Technical Analysis of Stocks

While fundamental analysis dives deep into a company's financials, technical analysis focuses on its price and volume data, trying to decipher the story told by the market's whispers and roars. It's like reading a chart-based language to predict future price movements and identify trading opportunities.

Significance in Investing

Technical analysis helps

  • Identify trends: Uptrends, downtrends, and sideways movements can be spotted to ride the waves or avoid choppy waters.
  • Gauge sentiment: Market psychology reflected in price and volume fluctuations can indicate buying or selling pressure.
  • Time your trades: Entry and exit points can be identified based on chart patterns and indicator signals.
  • Manage risk: Stop-loss and take-profit levels can be set based on technical analysis to limit potential losses and lock in profits.

Types of Charts and Patterns

  • Line charts: Simple but effective, showing price movements over time.
  • Candlestick charts: More detailed, with colored candlesticks representing price movement, open/close, and high/low for each period.
  • Chart patterns: Head and shoulders, triangles, flags, and many more signal potential trend continuations or reversals.

Tools and Indicators

  • Moving averages: Smooth out price data to identify trends and support/resistance levels.
  • Relative Strength Index (RSI): Measures momentum and potential overbought/oversold conditions.
  • Bollinger Bands: Gauge price volatility and potential breakouts.
  • MACD: Signals trend direction and momentum based on moving averages.

Identifying Entry and Exit Points

  • Breakouts: Above resistance for uptrends, below support for downtrends.
  • Pullbacks: Temporary retracements within a trend offering buying opportunities.
  • Confirmation signals: Combining multiple indicators and patterns for stronger entry/exit signals.

Combining Fundamental and Technical Analysis

The best approach often combines both worlds. Fundamental analysis provides the company's underlying value, while technical analysis helps navigate short-term price movements. This synergy can lead to well-informed investment decisions.


Technical analysis is not a crystal ball. Market movements are complex and unpredictable.

Overreliance on any single indicator or pattern can be risky. Always use a combination of tools and consider a broader market context.

Practice and backtesting are crucial to refine your technical analysis skills.


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