Investing is a complex process that can be made easier by understanding the different analysis types available.
This article will introduce you to three different analysis types that can help you make better investment decision
1. Fundamental Analysis
Fundamental analysis is a method of measuring a security's intrinsic value by examining related economic and financial factors.
Fundamental analysts study anything that can affect the security's value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management.
The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued. If a security's intrinsic value is lower than its current price, then the analyst may believe that the security is undervalued and should be purchased; conversely, if a security's intrinsic value is higher than its current price, then the analyst may believe that the security is overvalued and should be sold.
The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial meaning of these terms isn't much different from their standard definitions.
Quantitative factors are related to information that can be shown in numbers and amounts, such as revenue or profit. Examples: company culture and customer satisfaction.
Qualitative factors relate to the nature or standard of something, rather than to its quantity. Examples: market share, product quality, and employee productivity.
2. Technical Analysis
Technical analysis is the process of examining financial data, trends and indicators to identify potential opportunities or risks in order to make investment decisions. This term refers to the use of charts and graphs in order to provide a visual representation of data.
Technical analysis involves studying a variety of factors such as stock prices, market volume, open interest (the number of contracts that are currently being traded), and moving averages (a technical indicator which smooths out short-term fluctuations) in order to find clues about future movements.
This information can then be used by investors to assess whether it's worth taking advantage of certain opportunities or avoiding potentially risky investments.
It is believed by technical analyst that all relevant information about a particular market or stock is already reflected to the price.
3. Sentiment Analysis
Market sentiment analysis is a developing technique that can be used in conjunction with fundamental and technical analysis. One of the more successful approaches of incorporating market psychology into a trading strategy.
Sentiment analysis is a field within NLP (natural language processing) that uses machine learning algorithms to analyze the emotionally charged language in texts. By understanding how people feel about certain events, sentiments can be determined and analyzed accordingly.
NLP is a branch of artificial intelligence that has been growing more scalable as technological advances have made it possible to process large amounts of data. This makes NLP an important tool for understanding and manipulating communication between people, animals, and machines. It is a way to study how the brain works, and it can help us understand diseases and disabilities.
Investor mood appears to be one of the most accurate predictors of future price fluctuations, according to empirical evidence. The sentiment of investors in the market can be used as a qualitative measure to gauge how they feel about different sectors, assets and markets.
There is no definitive answer to point out which analysis approach is better, since there are many factors to consider when making an investment and each approach could be the best method for one specific topic.
To learn more about each type of the analysis that we mentioned here, check our next posts!