Ramesh and Suresh are twin brothers with substantial investments in stock market. They started off their journey of investment in stock market in the year 2010, soon after they started working with an IT giant.
When it comes to investment in stock market both brothers follow a different school of thought. Ramesh is a long term investor and uses fundamental analysis to screen stocks for making his investment in stock market. As a result Ramesh has managed to invest in many winning stocks and turned his initial investment of 2 lacs into 20 lac rupees over a period of 9 years.
Suresh, on the other hand, believes in short term investing and uses technical analysis. He too started off his investment in stock market with an investment of 2 lacs but after 9 years in the stock market, the total worth of his investment is just 3 lac rupees. While Suresh made some initial gains on his investment, he has lost money several times, which wiped away his early gains. Besides this, high brokerage charges due to frequent buying and selling has also eaten into his profits.
Fundamental analysis and technical analysis are two different approaches used for investment in stock market. Fundamental analysis works best for long term investment which has been proven to be the best way to create sustainable wealth, whereas technical analysis is preferred for short term investing. Both fundamental analysis and technical analysis are used for researching and forecasting future trends in stock prices, and have their own advantages and disadvantages.
To help understand which method is best for investment in stock market, let’s take a detailed look at both.
Fundamental analysis is a method of assessing securities by measuring the intrinsic value of a stock. It involves the study of financial condition of a company, its management, the overall economy and the sector in which it is operating.
In technical analysis no attempt is made to measure a stock’s intrinsic value. Rather the focus is on stock charts to identify patterns and trends which suggest the future movements of a stock price. In technical analysis the main parameters considered are the stock’s price and volume. Some of the most popular forms of technical analysis are support and resistance, trend lines, and simple moving averages.
The drawbacks of technical analysis include mixed signals by indicators in some cases when used in isolation. While one indicator could signal a buy, the other could signal a sell which can lead to confusion. At times, the technical signals generated may suffer from a time lag, and by the time the trader gets a clear signal the price action could already be over.
Fundamental analysis is best for wealth creation through investment in stock market.
While technical analysis may help, traders to place some winning trades in the short term, it is not enough to create sustainable wealth due to the high market volatility in short term. On the other hand, fundamental analysis helps an investor to invest in quality businesses which will outperform in the long run, thereby creating wealth for investors.