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Predicting future moves in the stock market has become a science. This form of prediction has become known as technical analysis. Traders who take this approach to investing in the stock market usually hold stocks for a short time period and then sell their stocks once the predicted profit has been achieved.

The foundations to technical analysis can be found in the understanding that stock price movements are predictable. All the factors affecting the value of a stock are reflected in the stock market with the greatest efficiency that can be found in any type of market. Movements in the stock value follow predictable historical trends, coupled with the efficiency of the market make it doable to predict the direction the stock is going to go.

Technical analysis is a very short term method of investing because the potential long term growth of a company is not taken into statement through this method. Trades are timed to exactly reflect the upward and downward trends in the market so nothing is left to chance. Because buying and selling go through at specific times, losses can be minimized if the market does not move in the predicted manner.

Many methods of predicting the movement of the market have been developed for use in technical analysis. These methods for the most part are based on the ’support’ and ‘resistance’ concept. How this works is that, support is the level by which a downward price is predicted to increase by and resistance is the level by which an upward price is expected reach before coming down again. To place this in clearer terms prices tend to fluctuate between a support and resistance levels.

Market movements are predicted for a massive part through the use of charts (mostly bar charts). The horizontal axis represent time be it a minute, hour, day or week, while the vertical axis represents the price of the stock. By looking at the chart a trend for the stock value can be traced.

A trained analyst studies the chart and can see certain patterns in the chart that they can then use to predict for future movements in the price of stocks. As is the case with most things there is no one single pattern that fits all. There are hundreds of different types of movements, indicators and patterns that can be used. By combining a number of different indicators technical analysis can make it doable for an investor to become very successful on the stock market.

Fundamentals are associated with the economic health of a company, measured in terms of revenues, earnings, assets, liabilities, Return on Equity (ROE), Return on Assets (ROA), Return on Investments (ROI), growth prospects and cash flows, etc. The fundamentals tell you about a company. You can state a company is having robust fundamentals if it is growing at a nice pace, generating a profit, has limited debts and abundant cash.

The analysis of a company’s fundamentals involves getting deep into its financials, rather than day-to-day movement in its share price. Equity researchers normally do fundamental analysis in order to compute the intrinsic value of a company’s stock. If a company’s stock is trading above the intrinsic value or clean value, then the stock is overvalued. If a company’s stock is trading below the intrinsic value, then the stock is undervalued. However, if you watch the stock markets very closely, the share price of most companies never matches the clean value. Often, day traders and investors who would like short term investment options invest in those stocks, regardless of the companies’ long term growth prospects. However, long term investors generally like to invest in companies with robust fundamentals and ignore near-term share price movements.

The following are various components that constitute a company’s fundamentals:

Revenues: Revenues (sales) are the total amount of money received by a company through the income of its goods and services during a specific period of time. Revenues are one of the most important barometers of the growth of a company as it indicates whether there is demand for their products and services.

Cash flows: Cash flows are calculated by deducting a company’s cash payments from cash receipts over a particular period of time. Cash flows indicate the liquidity position of a company. However, one must pay particular attention to the operating cash flows, since the health of the business can be most clearly seen there.

Net income: Net income, which is also called the ‘bottom line’, is calculated by subtracting from revenue, all of the company’s costs, such as operating costs, interest expenses, depreciation, taxes and other expenses associated with running the business.

Balance Sheet: Balance sheet is the company’s financial statement, which reflects its assets and liabilities. A company’s fundamentals are stated to be robust if its assets are significantly higher than the liabilities. However, one must carefully examine companies who are reporting massive intangible assets as they might have questionable liquidation value to offset any real liabilities.

Return on Assets (ROA): ROA is an Indicator of a company’s profitability, which is calculated by dividing the net income for the past 12 months by total average assets of the company. This is one of the important indicators, which long-term investors think about before investing into a particular stock.

Although long-term investors and institutional investors think about a company’s fundamentals before investing, the share price of a company often does not correspond to the fundamentals – which can present enormous investment opportunities. A company’s long-term growth is driven primarily by fundamentals, while a company’s share price can be driven by short-term news and investor sentiment, which can be extremely volatile. Each investor must think about a company’s fundamentals before investing into its stock if you want to acquire stable returns over the long term.