Fundamental Analysis v/s Technical Analysis

Stock market analysts can broadly be divided into two kinds. Fundamental analysts and technical analysts. What is fundamental analysis and what is technical analysis ?

Fundamental analysis deals with assessing the worth of a company's stock price based on company's fundamentals i.e, balance sheet, cash flows, quarterly reports and deciding if the stock price is undervalued, overvalued or fairly valued before making an investment decision.

Technical analysis involves studying the movement of stock prices in the past to predict the future stock price. It involves studying the stock patterns, moving averages etc., to determine how the stock will behave in the future. Technical analysts believe the value of a company is reflected by it's present stock price and there is no need to study the company's books to assess the worth of the company.

As a beginner in the market, I was always confused which way to go. Whats better ? Technical analysis or Fundamental analysis ? There is no straight answer to this question and today I believe one should not blindly follow either the technical analysts or fundamental analysts. There is a lot more to investing than just fundamental analysis or technical analysis. There are a lot of factors that come into play in deciding the stock price that cannot be predicted by either fundamental analysis or technical analyis. There are a lot of factors that lead to an imperfect market causing the stock prices to be overpriced or underpriced.

If the market was always perfect, then there was no point in investing. The imperfections in the market are an opportunity that the skillful investors should capitalize on. The most important factor to consider before one invests in a company is the growth opportunities for the company and how the company's stock is priced in comparision to these opportunities. The "scalability of business" is what one should look at before investing. Also, the promoters play a significant role in deciding the company's future. How a company grows has a lot to do with the abilites of the promoters. Their vision for the company and the passion towards the company is undoubtedly one of the most important parameters that decides if the company succeds or fails.

There are also factors that are external that can have an impact on the stock price. The most important being the sentiment. It's the human emotion of greed and fear that invariably leads to cycles of boom and bust causing abberations in stock prices. Then, there is the Government policy, Money supply, perception by the FII's (for emerging markets like India). Even non economic events like war, drought, floods, terrorist attacks, Election Results
affect the market directly or indirectly.

To summarize, market has its own reasons to rise and fall and cannot be accurately predicted. But one needs to have an open mind and take advantage of the abberations in the market that occur from time to time and capitalize on these opportunities to make money.