Fundamental analysis is based on the premise that any security (and the market as a whole) has an intrinsic value, or the true value as estimated by an investor. This value is a function of the firm. s underlying variables, which combine to produce an expected return and an accompanying risk. By assessing these fundamental determinants of the value of a security, an estimate of its intrinsic value can be determined. This estimated intrinsic value can then be compared to the current market price of the security. Similar to the decision rules used for bonds, decision rules are employed for common stocks when fundamental analysis is used to calculate intrinsic value.

In equilibrium, the current market price of a security reflects the average of the intrinsic value estimates made by investors. An investor whose intrinsic value estimate differs from the market price is, in effect, differing with the market consensus as to the estimate of either expected return or risk, or both. Investors who can perform good fundamental analysis and spot discrepancies should be able to profit by acting, before the market consensus reflects the correct information.

Fundamental analysis is based on the premise that any security (and the market as a whole) has an intrinsic value, or the true value as estimated by an investor. This value is a function of the firm. s underlying variables, which combine to produce an expected return and an accompanying risk. By assessing these fundamental determinants of the value of a security, an estimate of its intrinsic value can be determined. This estimated intrinsic value can then be compared to the current market price of the security. Similar to the decision rules used for bonds, decision rules are employed for common stocks when fundamental analysis is used to calculate intrinsic value.

In equilibrium, the current market price of a security reflects the average of the intrinsic value estimates made by investors. An investor whose intrinsic value estimate differs from the market price is, in effect, differing with the market consensus as to the estimate of either expected return or risk, or both. Investors who can perform good fundamental analysis and spot discrepancies should be able to profit by acting, before the market consensus reflects the correct information.

Under either of the two fundamental approaches, an investor will have to work with individual company data. Does this mean that the investor should plunge into a study of company data first and then consider other factors such as the industry within which a particular company operates or the state of the economy, or should the reverse procedure be followed? In fact, each of these approaches is used by investors and security analysts when doing fundamental analysis. These approaches are referred to as the "top-down" approach and the "bottom-up" approach.

With the "bottom-up" approach, investors focus directly on a company's basics, or fundamentals. Analysis of such information as the company's products, its competitive position, and its financial status leads to an estimate of the company's earnings potential, and, ultimately, its value in the market.

Considerable time and effort are required to produce the type of detailed financial analysis needed to understand even relatively small companies. The emphasis in this approach is on finding companies with good long-term growth prospects, and making accurate earnings estimates. To organize this effort, bottom-up fundamental research is often broken into two categories, growth investing and value investing.

Growth stocks carry investor expectations of above-average future growth in earnings and above-average valuations as a result of high price/ earnings ratios. Investors expect these stocks to perform well in the future, and they are willing to pay high multiples for this expected growth.

Value stocks, on the other hand, feature cheap assets and strong balance sheets. Value investing can be traced back to the value-investing principles laid out by the well-known Benjamin Graham, who wrote a famous book on security analysis that has been the foundation for many subsequent security analysts. Growth stocks and value stocks tend to be in vogue over different periods, and the advocates of each camp prosper and suffer accordingly.

In many cases bottom-up investing does not attempt to make a clear distinction between growth and value. Many companies feature strong earnings prospects and a strong financial base or asset value, and therefore have characteristics associated with both categories.

The top-down approach is the opposite to the bottom-up approach. Investors begin with the economy and the overall market, considering such important factors as interest rates and inflation. They next consider likely industry prospects, or sectors of the economy that are likely to do particularly well (or particularly poorly). Finally, having decided that macrofactors are favorable to investing, and having determined which parts of the overall economy are likely to perform well, individual companies are analyzed.

There is no "right" answer to which of these two approaches to follow. However, fundamental analysis can be overwhelming in its detail, and an investor should decide which approach seems more reasonable and try to develop a consistent method of action.

Technical analysis can be defined as the use of specific market-generated data for the analysis of both aggregate stock prices (market indices or industry averages) and individual stocks.

The technical approach to investing is essentially a reflection of the idea that prices move in trends which are determined by the changing attitudes of investors toward a variety of economic, monetary, political and psychological forces. The art of technical analysis - for it is an art - is to identify trend changes at an early stage and to maintain an investment posture until the weight of the evidence indicates that the trend is reversed. Technical Research tools

Technical analysis is sometimes called market or internal analysis, because it utilizes the record of the market itself to attempt to assess the demand for, and supply of, shares of a stock or the entire market. Thus, technical analysts believe that the market itself is its own best source of data.

Economics teaches us that prices are determined by the interaction of demand and supply. Technicians do not disagree, but argue that it is extremely difficult to assess all the factors that influence demand and supply. Since not all investors are in agreement on price, the determining factor at any point in time is the net demand (or lack thereof) for a stock based on how many investors are optimistic or pessimistic. Furthermore, once the balance of investors becomes optimistic (pessimistic), this mood is likely to continue for the near term and can be detected by various technical indicators. As the chief market technician of one New York firm says, "All I care about is how people feel about those particular stocks as shown by their putting money in and taking their money out."

Technical analysis is based on published market data as opposed to fundamental data, such as earnings, sales, growth rates, or Government regulations. Market data include the price of a stock or the level of a market index, volume (number of shares traded), and technical indicators, such as the short interest ratio. Many technical analysts believe that only such market data, as opposed to fundamental data, are relevant.

Recall that in fundamental analysis the dividend discount model produces an estimate of a stock's intrinsic value, which is then compared to the market price. Fundamentalists believe that their data, properly evaluated, indicate the worth or intrinsic value of a stock. Technicians, on the other hand, believe that it is extremely difficult to estimate intrinsic value and virtually impossible to obtain and analyze good information consistently. In particular, they are dubious about the value to be derived from an analysis of published financial statements. Instead, they focus on market data as an indication of the forces of supply and demand for a stock or the market.

Technicians believe that the process by which prices adjust to new information is one of a gradual adjustment toward a new (equilibrium) price. As the stock adjusts from its old equilibrium level to its new level, the price tends to move in a trend. The central concern is not why the change is taking place, but rather the very fact that it is taking place at all. Technical analysts believe that stock prices show identifiable trends that can be exploited by investors. They seek to identify changes in the direction of a stock and take a position in the stock to take advantage of the trend.

The following points summarize technical analysis:

1. Technical analysis is based on published market data and focuses on internal factors by analyzing movements in the aggregate market, industry average, or stock. In contrast, fundamental analysis focuses on economic and political factors, which are external to the market itself.
2. The focus of technical analysis is identifying changes in the direction of stock prices which tend to move in trends as the stock price adjusts to a new equilibrium level. These trends can be analyzed, and changes in trends detected, by studying the action of price movements and trading volume across time. The emphasis is on likely price changes.
3. Technicians attempt to assess the overall situation concerning stocks by analyzing breadth indicators, market sentiment, and momentum.