Question

Determining a Stock's Value

Of the three different investment theories used to evaluate and determine a stock's value (Fundamental Analysis, Technical Analysis, and Efficient Market Hypothesis), which one of these do you think is the most effective and why? Make sure to discuss the facts, or reasons, supporting your conclusion.

Answer 1

Of the three different investment theories, I think Fundamental Analysis is the most effective one. Fundamental analysis considers sales, earnings, growth prospects, debt, quality of management, competitive advantages, overall economic situation, key ratios, etc. to determine a stock's value. Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings and staying power. It gives a thorough understanding of the business of a company from different angles. It gives due weightage to the quality of management, overall industry scenario, etc. which is lacking in technical analysis and efficient market hypothesis. Many great investors use fundamental analysis to take investment decisions and have found it to be the most reliable tool for investment decisions. Fundamental analysis takes in consideration all the aspects which can effect a company's earnings directly or indirectly and thus helps in determining a fair value of a stock most effictively.