How to analyze companies? Fundamentally or technically?

How to analyze companies? Fundamentally or technically? A beginner investor and one who is desperate for a strategy that has not worked so far will surely face such a dilemma. To a large extent, the answer to this question is in ourselves, that is, in our preferences. At the beginning of your journey with investing in securities, it is worth defining the goal, time horizon and capital that you want to invest in investing in shares. What is all this needed for? You will find out about it by reading the article below.

Identify yourself

The key moment when choosing a company analysis method is to consider what parameters we want to pay the most attention to and what we really care about. We should consider what capital we have, how long we want to invest it on the market, define the purpose of the investment and what rate of return we are interested in.

We will start with the simplest issue, i.e. determining how long we want the company to work for our profit. Of course, we can choose different ways of investing, from the increase in the value of the security over time, to placing it in companies that regularly pay dividends, to looking for short trends. Nevertheless, the point is that if we dream of "keeping" from companies and increasing their value over time, let's give up technical analysis. Why? This tool is effective in determining short term movements in the stock market. Thanks to it, we can (in long-term investing) only outline a certain tendency (trend), examine the price behavior at certain volumes and the possible moment of entering a transaction, but nothing else. When investing capital in shares for a longer period of time, it is pointless to follow the levels of overbought and oversold, e.g. on RSI indicator.

So let's assume that the longer we plan to invest in stocks, the further we analyze our analysis to find technical buy / sell signals. In my opinion, AT is useful, for example, in day trading on companies, with the emphasis that we need liquid assets, large capital and low transaction costs.

Capital, return and profit

It is also worth considering real rates of return. Real is a very good and key word. If we go to the stock exchange with the intention of buying shares and earning 400% on them within a month, it is worth considering whether the shares are the right instrument for us. Currently on Warsaw Stock Exchange there are quite limited possibilities to play for a short time (for declines) on the securities of companies, therefore we should rather focus on looking for those that will actually give us a profit in the form of an increase in their value or a dividend payment. It is worth emphasizing that good investors can generate a result of 25-30% per year.

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When choosing a brokerage account, we should pay particular attention to the costs of its maintenance and transaction costs, possible commissions for transfers to other banks and minimum transaction fees. If we have a small amount on the account, e.g. PLN 1000, then keeping it for PLN 50 per year generates a considerable cost for us in the form of 5% of the initial capital. Assuming that we want to play in the short term, engaging all the capital (e.g. for a few days), even our company generated 3% of profit for us, placing orders (buy + sell) with min. commission on the order in the form of PLN 5 or 0,39% eats 1% of our committed capital. What if the company goes in a direction not assumed by us? We are already 1% in the back at the start. This cost increases when you play with a smaller deposit or divide it into, for example, 2 companies. Taking into account the smaller deposits allocated to shares, it is better to accumulate them for a longer period due to lower transaction costs. This principle should also work when transferring, for example, a part of our savings to investments in shares.

Consider the following example. For 3 months, we set aside the amount of PLN 200 (in 3 months we have PLN 600). We buy shares of the same company every month. The real cost of one transaction is PLN 5 or 0,39% of the order value (if the amount is higher than PLN 5). Buying shares for the amount of savings saved is 5 × 3, which gives us PLN 15 (3 transactions, 1 in a month for the amount of PLN 200). Our upfront investment (excluding selling costs) is 2,5% negative, not including price averaging. If we waited and submitted the same order for PLN 600 (without dividing it into 3 tranches), the real cost of our transaction would be 0,83%. It is worth using this method when we intend to buy securities for a longer term and when market conditions (volatility) are on our side. To put it simply, when the price is not in a strong trend, but in a consolidation.

Technology or foundations in action?

After determining the above parameters, we are able to adjust the analysis to them. The first method - technical is based on the study of the chart. We are not too interested in the company's financial parameters, its condition, reputation, etc. We focus only on the price chart and on the basis of various tools (indicators, oscillators, averages, trend lines) we try to catch and determine the probability of a specific movement.

There is more to the proverbial fun when analyzing companies fundamentally. In my opinion, it takes some time, practice and learning the basics of accounting and financial / economic analysis to spot certain patterns. Fundamental analysis requires us to be more involved in reading reports, statements, and assessing the financial condition of the company, its staff and management. We try to get to know the company and the industry in which it operates (mainly in financial terms) in order to be able to assess the profitability and success of the investment.

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What about effectiveness?

Therefore, it is easy to draw the first conclusion regarding the verifiability of both analyzes. If we want to catch only a short move (which we believe will last a week / 2 weeks / month), does it make sense to spend a lot of time getting to know the company's financial condition? Is it necessary for us to determine the trend? I think not. This can be done by observing the price, which is technical analysis. So let's consider the opposite. Do we want to engage our funds for several years, based on the prevailing upward trend in its assets, without knowing the basics of the company's operation and functioning, its financial condition, value, solvency, etc.? The answer should also be negative. A trend alone is not enough. Getting to know the industry, the specifics of the operation and the company itself is necessary to objectively assess what we invest our capital in.

Of course, as with everything, there are exceptions. What I mean is that technical analysis can go hand in hand with fundamental analysis. A good company can be fundamentally attractive and have a favorable technical situation in terms of its assets.

Summation

We will extend these two quite briefly described methods in the following articles with specific examples of analyzes. On the other hand, the lesson we should learn from this article is that no matter what we use, the effectiveness and awareness of the tool used is important. Common sense is your best advisor. Asking yourself a few simple questions for any form of analysis will make this task easier. It is better to be out of position than to make a bad decision, which in this case costs you to lose some of your capital.