Question

the 3 types of security analysis: economic, industry, and fundamental. Which one is the least useful when evaluating a potential stock or option investment in a particular company? Which ones are most useful? does it make a difference if you are a short-term trader vs. long-term investor? List them in order of usefulness in your evaluation process to decide whether or not to invest in a particular stock or option from a short-term investors' perspective and from a long-term investors' perspective. Also, what is Technical Analysis? and where does it fit in the evaluation of a potential securities investment?

Answer 1

1. The least useful technique is economic analysis while evaluating a potential stock or option investment in a particular company.

The reason is that economic analysis is gross level measurement of a country's overall business enviornment and potential business risk. If overall economic condistion is bad, ideally all the company's stock would underperform and in economic boom, all the company should do well.. But this may not be true... We can wee when country's currency is depriciated ideally exporte firms should do very well due to higher realization in revenue. Not every export company do well in that scenario, some company did not do well because of its own fundamental ( like very high debt, less operational efficiency etc.). Hence, economic analysis won't have direct correlation ( definitely some indirect impact) with economic activity and the stock performance .. Hence, it is least useful

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Most useful technique for stock evaluation is fundamental analysis....

In this fundamental analysis , we will focus on fundamentals of the company like return on equity, ratio, debt position, earning per share, price earning ratio etc. We also look after the strength of balance sheet, profit & loss statement & cashflow statement. For example, a company is profitable, but due to high credit sales facing cash flow issue. Hence, daily operation is affetced. Hence, despite of being profitable still company's stock underperforms.

Total Risk = Market risk (systematic) + Firm related risk (Unsystematic)

Unsystematic risk can be determined from fundamental analysis, which can be handled by diversification of stocks.

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For short terms and long term investment, strategy for evaluation may differ. For short term we may focus on perticular industry segment. It is often observed that all stocks of a particular industry move in same direction. It is easier to focus on industry analysis for short term. But, in long term every company of same industry ( which are currently on bull run) may not be profitable. Hence, each and every company needs to be judged with due diligence.

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Technical analysis is trading tool engaged to forecast the price movement of stock / asset value with the help of previous data / statistics gathered ( like price, volume, open interest etc). It is totally oposite of fundamental analysis . In fundamental analysis we assume that price of stock is dependednt on fundamentals. For technical analysis, stocks are assumed to repeat the trend again. This is useful for short term evaluation.