Fundamental analysis:
• Involves assessing the short-, medium- and long-range prospects of different industries and companies.
• It involves studying everything, other than the trading on the securities markets, which can have an effect on a security’s value: macroeconomic factors, industry conditions, individual company financial conditions, and qualitative factors such as management performance.
• Most important factor: the actual or expected profitability of the issuer, thus fundamental analysis pays attention to: o Debt-equity ratio, profit margins, dividend payout, earnings per share o Interest and asset coverage ratios o Sales penetration, market share, product or marketing innovation, and the quality of its management
Technical analysis:
• The study of historical stock prices and stock market behaviour to identify recurring patterns in the data.
• Study price actions: price movements, trading volumes, and data on the number of rising and falling stock issues to gain insights into the emotions and psychology of investors.
Market Theories
• The efficient market hypothesis assumes when new information about a stock appears, investors reassess the intrinsic value of the stock and adjust their estimation of its price accordingly. Therefore, at any given time, a stock’s price fully reflects all available information and represents the best estimate of the stock’s true value.
• The random walk theory says that new information concerning a stock is disseminated randomly over time. Therefore, price changes are random and bear no relation to previous price changes. If this is true, past price changes contain no useful information about future price changes because any developments affecting the company have already been reflected in the current price of the stock.
• The rational expectations hypothesis assumes that people are rational and make