The most common methods that investors use to analyze the benefits and risks associated with the long-term investment in the stock market like fundamental analysis, technical analysis and quantitative analysis. Here is a brief description of all three.
Most investors who want to assess the long-term investment decisions, start with fundamental analysis of companies, individual stocks or the market as a whole. Fundamental analysis is the process of determining the internal value of a security, evaluating all aspects of the business or market. Tangible assets, including land, equipment or buildings that the company owns are considered in combination with intangible assets like trademarks, patents, brands and intellectual property. In assessing the broader scope of the stock market, investors use fundamental analysis of economic factors, including the overall strength of the economy and industry sector conditions.
Fundamental analysis leads to the value of the security review that in comparison with the current price of securities. Investors use comparisons to determine the long-term investment is worth to buy because it is undervalued or if it is worth to sell because it’s overpriced.
The process of rating securities based on statistics known as technical analysis. Analysts and investors use data about market activity, such as historical data, stock prices and trading volume patterns in the movement of securities. While fundamental analysis attempts to show the intrinsic value of the security or a particular market, the technical data is intended to give an idea about the future activities of, the securities or the market in General. Investors and analysts who use technical analysis believe that in the future indicators can be determined through analysis of models based on past performance data.
Technical analysis uses data from short time periods to develop models used to forecast securities market movements, while fundamental analysis is based on information that spans years. Because of the short duration of data collection in technical analysis, investors seek to use this method more in the short trade. However, technical analysis can be a useful tool for evaluating long-term investments in combination with fundamental analysis.
Assessment of the historical performance of the company or the broader market is often carried out through quantitative analysis. The investors perform quantitative analysis using simple calculations of financial indicators such as earnings per share (EPS), or more complex calculations such as discounted cash flow (DCF).
The results of the quantitative analysis gives an idea about the cost or the historical performance of certain securities or market. But quantitative analysis is not often used as separate methods for the assessment of long-term investments. Instead, quantitative analysis is used in conjunction with fundamental and technical analysis to determine the potential benefits and risks of investment decisions.
Fundamental analysis is used most often when determining the quality of long-term investments in a broad range of securities and markets, while technical analysis is more used in the review of short-term investment decisions, such as active stock trading. Investors use quantitative analysis to assess the financial stability of the company.
While some investors prefer to use one method analysis for assessing long-term investments, a combination of fundamental, technical and quantitative analysis is most beneficial.