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What Are the Different Methods of Capital Market Analysis?

By K. Reynolds
Updated May 16, 2024
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Fundamental analysis and technical analysis are the two methods of analyzing the capital markets. These forms of analysis can be used together or independently. Both methods are used in a variety of financial markets throughout the world, and many investors use a combination of techniques from both methodologies to discover profitable investment opportunities. When done correctly, capital market analysis can help investors obtain above-average investment returns while avoiding detrimental losses.

In every capital market, there are certain metrics and statistics that cause a stock price to move higher or lower. The process of conducing fundamental analysis involves analyzing the financial statements and key ratios that help determine the financial health of a company and thus its potential value. Many investors use fundamental principles as their only form of capital market analysis, because they believe that over a long time period, the fundamentals of a company will ultimately determine the price movement of its stock. When conducting fundamental analysis of the capital markets, investors typically review the earnings and profits of companies in addition to the economic outlook of the marketplace in general to determine whether the stock prices of certain companies are overpriced or undervalued. Although fundamental analysis is great for estimating the long term-price movements of a stock, it can sometimes fail to determine the short-term price movements.

Technical analysis is another popular form of capital market analysis. This methodology revolves around using technical data and indicators to predict the future price movements of a stock. Investors who use technical analysis techniques often review pricing charts to determine trends and multiple levels of pricing support and resistance. The premise with this form of capital market analysis is that price movements are never random and will follow repetitive, predictable trends. Technical analysis techniques can be used in any marketplace, because these strategies are based on data and statistics.

Savvy investors often used a combination of fundamental and technical analysis techniques to predict the price movements of a stock. The fundamental analysis is conducted to determine how the price of a stock should move based on the economic data that is being presented. Technical analysis is then conducted to confirm the fundamental analysis. Generally, both methods of capital market analysis are utilized, because short-term price movements can be contradictory to the fundamental analysis, so technical analysis can be used to determine the short-term price movements based on the existing market data.

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