Two Major Schools of Stock Analysis
By Saghir Aslam
Irvine , CA

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)

Some investors buy stocks because of a company’s past performance, financial position and future growth prospects. Others are more interested in the trend and direction of the stock’s price. Whether they know it or not, these two groups of investors represent the two major schools of stock analysis: fundamental and technical. While these are two very different ways of evaluating stocks, they are worth examining and can be used together to improve your stock purchasing choices. They both have their place, their value. Both can win, different rules for each. But you may combine them.

Fundamental analysts see a share of stock as a fractional part of the company as a whole. They begin by examining the balance sheet of a company and determining its book value. Then, they look at a variety of financial data, such as earnings per share, price-to-earnings ratio, return on equity, and debt-to-equity ratio. They are also interested in less number-intensive data, such as market share, the quality of management and the industry condition, to ascertain if the company’s future prospects and corresponding stock price will rise or fall.

Fortunately, individual investors don’t have to dig through a company’s financial statements in order to get a general assessment of a company’s fundamental outlook. A wealth of information is available from financial reporting organizations, as well as most investment firms. Most sources will provide options along with the data, which individuals can use to better assess their own interpretations. Today all of this information is available over the internet, accessible in many periodicals. In this day and age it is very simple and easy.

Technical analysts are not as concerned with a company’s financial performance; instead, they focus on the market for the stock. They believe that everything sells for its approximate worth. So, it is ultimately the market, not a company’s financial performance, that determines the price of the stock. These analysts spend their time measuring price performance and volume behavior other known as supply and demand, as well as psychology of investors. They are often referred to as “chartists” because they chart price performance over time to determine ceilings (high) or floors (lows) of a stock’s price. Many charting services are available through the internet and even through certain newspapers.

Technical analysis is more difficult for the individual investors than fundamental

analysis. While much data is available, the methods of technical analysis are complicated and often confidential. Investment newsletters based o technical analysis will predict future price movements but keep the systems that generated the predication secret. There are some general methods that individuals with the time and a computer can utilize. For example, charting the price performance of a particular stock will often reveal certain patterns and behaviors at certain price levels or in certain market conditions. However, the most sophisticated technical analysis is best left to professionals.

While the two major approaches to stock analysis are very different, they do not necessarily operate independently of one another. First, fundamental financial performance is a catalyst for people’s desire to own a particular stock. This increased demand will be measured by technical analysts who will in turn predict that the price will increase.

Successful analysts come from both the fundamental and technical schools. Individual investors don’t need to choose one or the other. Rather, they can incorporate the beliefs of both schools when choosing stocks. They can use fundamental analysis to identify what to buy. Then, they can use technical analysis to decide when to buy.

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)


Editor: Akhtar M. Faruqui
2004 . All Rights Reserved.