Technical and fundamental analyses are two different approaches that are used for analyzing stocks and making investment decisions.
Technical analysis: It is a method for assessing securities that includes looking at market data such as past prices and size. According to technical analysts, it is possible to anticipate a stock’s future performance using the previous performance shown in charts and other technical indicators.
They use tools such as trend lines, moving averages, and oscillators to identify patterns and make trading decisions.
Fundamental analysis, on the other hand, is a method of evaluating a stock by analyzing its underlying business and financial performance. This includes analyzing financial statements, management quality, industry trends, and economic conditions.
Fundamental analysts believe that a stock’s true value can be determined by analyzing its underlying fundamentals, and that the stock’s price will eventually reflect its true value.
They use financial ratios such as P/E, P/B, and Dividend yield to evaluate the stock’s value and make investment decisions. Both technical and fundamental analyses have their own benefits and drawbacks.
Technical analysis is considered more precise and objective, but it does not take into account the underlying fundamentals of the company.
Fundamental analysis is considered more comprehensive, but it can be affected by subjectivity, and it takes a long time to analyze the company’s financials. Investors often use a combination of both to make investment decisions.
Let’s say, for example, we take the stock of Reliance Industries Limited (RIL).
Technical analysis of RIL:
For analyzing RIL on its technical basic, we are using moving average which is one of the most commonly used technical indicators. It is a trend-following indicator that helps in smoothing the price action by averaging the past prices.
A 50-day moving average is a popular choice for short-term traders, whereas a moving average of 200-days is commonly used by long-term investors.
Based on the moving averages, if a stock price is hovering above its moving average, it is generally considered to be in an uptrend. Conversely, a price below the moving average is considered as a sign of downtrend.
In this analysis, we have used moving averages of 50-day and 200-day for analyzing the trend of RIL stock which gives us two cases as follows:
- If the 50-day moving average is above the 200-day moving average, it would indicate that the stock is in a bullish trend, which would be a buy signal.
- On the additional hand, if the 50-day moving average goes below the 200-day moving average, it would be a sign of the bearish trend, which would be a sell signal.
However, it’s worth mentioning that before making any investing decisions, it’s important to remember that technical assessment is only one component of stock analysis and should be utilised in conjunction with fundamental analysis and other market research.
Fundamental analysis of Reliance Industries Limited (RIL) would involve analyzing the underlying business and financial performance of the company to determine its intrinsic value and to assess its suitability as an investment.
Here are a few key fundamental factors to consider when analyzing RIL:
- Financial Statements: It uses the analysis of RIL’s, balance sheet, cash flow statement and income statement to assess its financial health, revenue growth, and profitability.
- Earnings per Share (EPS): A crucial indicator of a company’s profitability is its EPS. A greater EPS reveals that the company is making more money per share, which might be an indication of a robust and expanding business.
- Price-to-Earnings (P/E) Ratio: The P/E ratio is a general valuation metric that compares a stock’s price against its earnings. A stock may be considered as undervalued if its P/E ratio is lower, whereas a stock may be counted as an overpriced one if the P/E ratio is higher.
- Dividend Yield: Dividend yield is a measure of the amount of cash dividends paid out to shareholders relative to the stock price. A higher dividend yield may indicate that the company has a strong and stable business model and is committed to returning value to shareholders.
- Industry and Economic Environment: Analyze the company’s industry and the broader economic environment to assess the company’s growth prospects and the potential risks to its business.
- Management Quality: Look into the company’s management team and their track record to gauge their ability to lead the company and make sound business decisions.
An overall analysis of RIL’s financials shows that the company has a strong financial position, consistent revenue growth, and a healthy return on equity.
The P/E ratio of the company is currently at a reasonable level, the dividend yield is healthy, and the company operates in a growing industry.
RIL’s management team is experienced and has a good track record. All these factors together indicate that RIL could be a good investment opportunity for the long-term investors.
However, it’s crucial to remember that this is merely a basic study, and one should conduct a more thorough research before making any investment decisions.