Assume that the whole idea of investing is identifying how much a company is worth and how much is it going to grow in the future.

That leads to looking at the company’s book value and its forecasted growth rate.

It is the position of the Capital Market Authority (CMA) that unless an investor has a firm understanding of each of the various valuation ratios, then they have no right to invest.

The “suitability law” means that the investors must close their online trading accounts, if they are not suitable for taking on the risks of investing.

A firm understanding of the different sections of a research report will involve understanding that it consists of a company profile, a chart of stock performance, historical review of key indicators, forecasts of the growth expectations of the key indicators, and a complete list of risks that would either hurt the key indicators or spur them forward.

The two basic types of analyzes are called fundamental analysis and technical analysis.

While the battle for credibility between the two types of analyzes has been going on for decades in both the international and domestic markets, its time to bring you the readers up to speed about the various metrics that we track.

That way we can have an intelligent debate about the flagrant fouls that are being committed in the market place. Let’s take a look at the ongoing battle on a number of fronts:

1. In the US equity markets fundamental analysis has been defeated by technical analysis. Everybody is concerned with patterns of technical analysis in an era where high frequency traders (HFT) are manipulating the markets with huge volume.

2. In the currency markets fundamental analysis has been defeated by technical analysis for the same reason stated above.

3. In the commodity markets, the battle is still raging in terms of the credibility of the two types of analyzes. It is believed that the commodity market is showing the best fight as a platform. Its simply an issue of tangibility and consistent consumption of the underlying asset. People need to eat commodities daily, which makes the valuation of the individual commodity a daily concern. It cannot be whisked away in a whirlwind of data points like the equity and currency markets. However, it is better not to drop your guard because all three markets are open to leveraged computerized trading, which is also known as hot money or HFT. When the hot money decides to speculate on a specific commodity, currency, or equity they can inflate the prices without any regard to fundamental analysis.

4. With regard to Tadawul, the Saudi Arabian stock market, there is a different environment. Fundamental analysis is being introduced by the largest banks and brokerage firms through equity research reports. We prefer the Tadawul market to international exchanges because when you evaluate different markets on a relative basis it is the most honest market.

Let’s take a moment to dissect the different parts of the anatomy of research reports in an effort to highlight the key metrics.

When an analyst is trying to build a full picture for the educated investor he is likely to discuss both technical and fundamental analysis.

In terms of technical analysis of charts, the investor must understand two basic elements, which are resistance levels and support levels.

The idea is simply identifying trends and patterns where stock prices would probably not be able to rise further, or in the case of support levels the chart would identify levels where the stock prices would not fall further.

The various tools involve tracking historical trends through moving averages.
 
— Khalid I. Natto, [email protected], is chairman & CEO of The KIN Consortium