Question

a) What is the difference between fundamental analysis vs. technical analysis?

b) Discuss the market efficiency and its implication in the stock market?

Answer 1

Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock. Fundamental analysts study everything from the overall economy and industry conditions to the financial condition and management of companies. Earnings, expenses, assets and liabilities are all important characteristics to fundamental analysts.

Technical analysis differs from fundamental analysis in that the stock's price and volume are the only inputs. The core assumption is that all known fundamentals are factored into price; thus, there is no need to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic value, but instead use stock charts to identify patterns and trends that suggest what a stock will do in the future.

The most popular forms of technical analysis are simple moving averages, support and resistance, trend lines and momentum-based indicators.

Market efficiency refers to the degree to which market prices reflect all available, relevant information. If markets are efficient, than all information is already incorporated into prices, and so there is no way to beat the market because there are no under- or overvalued securities available. Market efficiency was developed by economist Eugene Fama, whose theory of efficient market hypothesis (EMH) stated it is not possible for an investor to outperform the market, and that market anomalies should not exist because they will immediately be arbitraged away. Investors who agree with this theory tend to buy index funds that track overall market performance and are proponents of passive portfolio management.