Stock market in terms. Guide Part 3

Fundamental analysis

One of the forecasting methods of stock prices is fundamental analysis.

As a rule, fundamental analysis is conducted on three stages:
1) Market estimation on the whole: production dynamics, economic activity level, consumption level, inflation rates, financial condition of the state;
2) Exposure of perspective industries of economy;
3) Estimation of companies, working in perspective industries; comparison of companies’ indices with each other; determination of stock "fair price". For calculation of stock "fair price" of any company its current financial and economic position and prospects of its development are important. As basic information sources for such calculation use:
• data of annual and quarterly reports about company activity;
• company publications about itself and public statements of company management;
• news publications;
• researches’ results, conducted by specialized organizations and other stock market participants.

As it is quite difficult to conduct a competent fundamental analysis, private traders and investors, preferring to rely upon fundamental market analysis, orient to the forecasts of the known analysts.

Technical analysis

Another popular method of prices forecasting is technical analysis.

Basis of technical analysis became the theory of Charles Dow – author of the well-known indices: industrial DJIA index and transport DJIA index.
Originally, the Dow theory was directed to the use of general tendencies of stock market as an index of the general state of economy and was no intended for stock prices forecasting. However, all further development of theory was directed to achievement exactly of this aim. Three postulates the technical analysis are based on:
1) Market takes into account everything.
Reasons that somehow can influence the market value of a stock (economic, political, psychological) will certainly find their reflection in its price, i.e any changes in the dynamics of demand and supply affect prices’ movement;
2) Prices’ movement is subjected to tendencies.
Concept of tendency or trend – one of the fundamental in the technical analysis. The charts of changes are compiled with the aim to expose tendencies (dynamics of prices) on the early stages of their development and conduct trades in accordance with their orientation.
Thus select three types of trends:
• bullish – prices move up;
• bearish – prices move dow;
• sideways – no certain direction of price movement. This movement is also named "flat".
3) History repeats.
Graphic price models, which were selected and classified during the last one hundred years, reflect the important features of psychological market condition. And if these models worked in the past, there are all grounds to suppose that they will work in the future.

The typical tasks of technical analysis are forecasting of short- and medium-term market tendencies and providing of recommendations concerning occasions for a purchase/sale. Recommendations are given exceptionally on the basis of historical information with the use of mathematical algorithms.
It is impossible to separate fundamental and technical analyses. Those, who use technical approach, know about influence of fundamental factors and take into account them. Fundamentalists, in their turn, having information about the prices’ level, direction of their last fluctuations and trade volumes, take these information into account.

Graphical technical analysis

The most popular is the bar chart, where the vertical axis reflects prices, and horizontal – time.
Information about price fluctuations is presented as the vertical column, which boundary values reflect minimal and maximal price. The price level of trades opening is represented by the horizontal stroke on the left of column, and the price of closing is specified by the proper stroke on the right.
The volumes of transactions concluded during a day are presented as a histogram in the lower part of the bar chart. The joint study of prices’ dynamics and trades’ volumes gives an opportunity to define whether one or another prices’ movement was supported by the majority of market participants, that gives greater credibility the exposed price signals.
The main instruments of graphical technical analysis are: trend lines, levels of support and resistance, and also different graphical structures.