Beside looking at Technical Analysis which looks at the trend of past events to forecast future events, long term investors may also want to look at Fundamental Analysis.
In many books and papers, Fundamental analysis is often presented as an direct opponent of Technical analysis. Typically the introduction would focus on the drawback of one method and highlight why the favored method is better.
Do not be confused. It need not be this way.
Fundamental analysis can co-exisit prefectly with Technical analysis. I often use both of them in my investment analysis. Oftentime while looking at the chart, I would also look at how the fundamental factors like the economy and market looks like.
In order to use them however, you would need to understand how each of them is applicable and to use them to the fullest effect.
I did some introduction to Technical Analysis and now let me do the same with Fundamental Analysis.
First a basic understanding of Fundamental analysis.
Fundamental analysis is a method of investment evaluation that uses economic, financial and other qualitative and quantitative factors to understand and predict future performance.
Unlike Technical analysis which presupposed trend, and therefore aggregated investor activities, as predictor of future direction, Fundamental analysis presuppose economic and macroeconomic factors as predictor of future direction
Fundamental analysts study factors that can affect the investment, including macroeconomic factors (like the overall economy, industry and political conditions) and company specific factors (like the financial condition and management of the company).
Since there are many factors to look at when using fundamental analysis, there are many methodologies within fundamental analysis itself, each with their supportor and detractor.
Most unit trusts (funds) invest based on certain fundamental analysis methodology. You might have come across terms like value, growth when reading a fund’s prospectus.
These terms basically means that the fund manager select stocks for the fund based on a fundamental analysis method that picks out value and growth respective. Here I will not go into the detail since this is an introduction.
As mentioned before, investing is a continuous learning process. As I learn more, I will be distilling and sharing what I gather here with you.
This article is part of a regular column on unit trust investing by Ken of 59Ideas published on Invest Insight. You may copy and use this article if you retain this message.
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