What is Fundamental Analysis?
Fundamental Analysis is a way that people attempt to find how much a company is worth. They then try to buy the stock when the market price is below the actual value of the company. They reason that eventually the market price will rise to meet the actual value of the company. Think of the phrase buy low sell high.
There are many fundamental analysis methods but they all involve analyzing the statistics and financial numbers of the company. Data that could be analyzed are profit, revenue, costs, growth, dividends, etc.
Some great examples of Fundamental Analysts are Warren Buffett and Benjamin Graham.
What is Technical Analysis?
Technical Analysis is a way that people attempt to find how a market price is going to move. They then try to buy the stock when they think the market price will soon go up. Think of the phrase buy high sell higher.
There are many technical analysis methods but they all involve analyzing the past movements and behavior of the market price. They generally are not concerned about the company itself. Data that could be analyzed are volume (number of people buying and selling), price movement (did the price move up or down), etc.
Some great examples of Technical Analysts are Jesse Livermore and Paul Tudor Jones II.
What is the Efficient Market Hypothesis and Random Walk Theory?
The hypothesis states that all publically available information on a company has already been considered and factored into the stock price. It is closely related to the random walk theory, which states that all short term price movement is random.
The Efficient Market Hypothesis is contrary to fundamental analysis. The hypothesis states that are enough rational people out there exploiting inefficiencies that no inefficiency is left for you to exploit. There is no research left that hasn’t already been considered by the millions of people in the stock market. Random Walk Theory is contrary to Technical Analysis for the theory states that all the price movements that technical analysts use are meaningless. Instead of picking stocks, followers of modern portfolio theory (efficient market and random walk adherents) manage risk by rebalancing asset classes.
Some great examples of Modern Portfolio Theorists are Eugene Fama and Burton Malkiel.
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Questions for the comments
Did my explanation make sense? Do you agree or disagree with what I said?
