The value of a financial asset can be estimated based on the expectations regarding the performance of the issuing company and the income that it will presumably provide, that is, its future.
These methodologies are framed within what has been called fundamental analysis . There is, however, another large group of methodologies that try to predict the evolution of a security based on its past. These methodologies are framed within technical analysis .
These analyzes will be applicable to any type of financial asset: stocks, debentures and bonds, and even currencies or real assets.
For all these reasons, when deciding which methodology is the most appropriate for valuing an asset, a series of questions must be considered:
Expected investment horizon
Normally, fundamental analysis provides good results when the investment horizon is long, that is, the investor commits resources for a more or less long period of time, investing in the long term.
On the contrary, technical analysis is more short-term oriented, trying to get capital gains from the rapid movements that occur in the market. For this reason, technical analysis has traditionally been associated with speculation.
Degree of market efficiency
Not all analyzes are valid in all markets or at all times.
A key issue to consider is the degree of efficiency of the market, that is, its ability to quickly and reliably form prices that discount all information concerning the securities.
This fact would cause the market price of the assets to continually revolve around their theoretical price, and the market would then be considered to function properly.
Markets can be adjusted to three different levels of efficiency, according to a classification that has already become classic:
The efficiency of a market is a difficult question to contrast, and furthermore, a market does not have to be equally efficient over time. In any case, you must have some notion of it to correctly choose the appropriate methodology.
TO KNOW MORE:
López Pascual, J. and Rojo Suárez, J. «STOCK MARKETS. ORGANIZATION AND OPERATION” (chap. 8 Stock Market Analysis . Ed. Pyramid)
Síguenos en