The Investment Tools in Egyptian Stock Market by Practice: Is It Fundamental or Technical? - Survey Study Ahmed S. Wafi MSc in Business Administration Dep. (Finance division) Assistant Lecturer in Business Administration Dep. (Finance division) Faculty of Commerce, Cairo University, Al Orman, 12613, Giza, Egypt Email:
[email protected] Abstract Nowadays, there are many investment tools that enable individual investors to use them in making buy stocks decision or sell stocks decision. Investors use technical analysis tools, fundamental analysis tools or both of them. Each one of these tools has many techniques, for instance, the fundamental analysis tools have; discounted dividend model (DDM), Multiplier models, discounted cash flow model (DCFM), Residual Income model (RIM) and others like analysts' recommendations. On the other hand, the technical analysis tools have many techniques, for example, support and resistance lines, Moving Average, Relative and Strength Index (RSI) Oscillator and Moving Average Convergence and Divergence MACD Oscillator. So, this study aims to answer the following question: What is the analysis tool (fundamental or technical analysis) used by investors in practice to buy stock or sell it?. This study will depend on the survey study by asking investors in Egyptian Stock Market by meeting some of them and via online survey. However, the author expects that most investors in Egyptian Stock Market depend on technical analysis tools rather than fundamental analysis tools, because, the technical investment tools based on historical data and it is easily to get it. In a contrast, the fundamental investment tools depend on the current and historical data and it is not easy to collect them, because, the Egyptian Stock Market is still not efficient market. Keywords: Fundamental Analysis tools, Technical Analysis tools, Buy and Sell Stock. Introduction Investors in all capital markets all over the world use one of techniques; fundamental or technical analysis and some investors depend on both of them. However, there are differences between investors who make buy decision or make sell decision by using fundamental and technical analysis in capital markets. In addition, the investors' self-characteristics such as; age, gender and capital market experiences influence the severity of using the investment techniques. In this research, the author aims to examine the difference between investors who buy stock or sell stock decisions by using fundamental or technical analysis or both of them. So, the author will depend on a survey study to compare the outcomes of this research with the results in the study provided by Wafi, et al., (2015,a) which concluded to the technical analysis methods are more credible than fundamental analysis in Egyptian Stock Exchange by
depending on empirical study (secondary data). So the author try to test in the current study based on survey study (in practice by investors), and search if this study confirm or not the results of Wafi, et al., (2015,a) study. In next sections, the researcher will illustrates the theoretical background of fundamental and technical analysis tools, then he will shows the studies which discuss the differences between fundamental and technical analysis tools by some different point of views in the Literature reviews section. After that, the section of research problem, and then, the hypotheses section, subsequently, the methodology, data and survey study section which the author will explain the main point that will do in the current research. Finally, the section of contribution. Theoretical Background Investors try to find a scientific technique which suitable with their invests goals. Therefore, they can make investment decision (buy or sell stock). So, there are two approaches to make investment decisions in the stock markets; fundamental approach and technical analysis approach (Wafi, et al., 2015a). A- Fundamental Analysis techniques Fundamental analysis defined as "Knowledge of the rules and fixed steps access to its objectives of determining the intrinsic value of shares in stock markets, through a general framework to study the expected economic forecasts, leading to sectors which generate an increase in sales and profits, therefore measure strength financial companies, efficiency of management and business opportunities based on historical financial statements and current conditions. Thus determine the stock fair value, and then compare them to market values resulting from interactions of supply and demand, to identify investment opportunities (profit or loss)" (Wafi, et al., 2015b, p. 939 – 940). For forecasting the stock value (intrinsic value) and make a buy or sell decisions, there are some models which used by analysts in stock markets. These techniques used by fundamental analysts who use the information of current and future earnings of the company to evaluate the fair value (Penman, 1991; Bernard, 1994; Fischer and Jordan, 1995; Bauman, 1996; Rielly and Brown, 2002; Jones, 2007; Bodie, et al, 2009; and Wafi, et al., 2015b), then the predicted value compared with the market value to determine whether it was able to invest in or to be excluded, i.e., to determine the buy or sell decision in stock. Wafi, et al., (2015b) illustrated that there are four main models which enable investors and fundamental analysts use them to use in the stock market in practice. So, the models (tools) of fundamental analysis can be seen in figure (1) as following1:
1
For more details, revise, Wafi, A. S., Hassan, H., & Mabrouk, A. (2015). Fundamental Analysis Models in Financial Markets–Review Study. Procedia Economics and Finance, 30, 939-947.
Fig.1; Stock Valuation Models (tools) in fundamental analysis
Source: Wafi, et al., 2015b, p. 940. In addition, investors can use other investment tools such as; Analysts' recommendation 1 and Financial Statements 2 (De Bondt and Thaler, 1990; Keane and Runkle, 1998; Kothari, 2001; and Easton, et al., 2002). B- Technical Analysis Technique: On the other hand, there is the technical analysis approach which has many different definitions from different point of views for many researchers and professionals such as: Chen (2010, p.2) who defined the technical analysis as "The study of how past and present price action in a given financial market may help determine its future direction". However, Wafi, et al., (2015a, p. 213) summarized many point of views of researchers and defined the technical analysis as "A Study of movements of past and current prices in a financial market which may help in specifying the trend in the future". Technical analysts and investors depend on technical analysis techniques to determine the suitable time for making a decision (buy or sell stocks), they study and plan the changing of pattern in stock value during period of investment. Therefore, the investors and technicians can determine the trend of stock value movement in the future. In these context, many researchers and professionals (e.g., Murphy, 1999; Schabacker, 2005; Brooks, 2006; Edward and Magee, 2007; Stevens, 2007; Hyerezyk, 2009; Chen, 2010; and Kirk, et al., 2011) believe that there are different divisions for technical analysis tools. Some of researchers and professionals approved that the charts patterns models are a Preliminary Techniques in the technical analysis tools. In addition, others which defined as the technical indicators, such as; Moving Average (Huang and Randall, 1987), Oscillator Indicators which includes; Momentum indicators (Jegadeesh and Tittman, 1993), Relative Strength Index (RSI) (Levy, 1967b; and Jensen and Bennington, 1970) and others. Also, Stevens (2007) believes that can add the Sentiment Indicators. From the foregoing, the technical analysis tools – after collecting different viewpoints – can be clarified in figure (2) as following:
1
This recommendations outcomes from fundamental analysts reports (who work in brokers companies) for individual investors. 2 Actually, this tools outcomes from the multiplier ratios.
Fig. 2; Technical analysis tools and models Moving Average Indicators
Chart Patterns Models
Subdivisions Technical Analysis Tools
1. Line Chart 2. Bie Chart 3. Point and Figure 4. Japanese Candlesticks 5. support and resistance lines
1. Simple Moving Average (SMA) 2. Linear Weightef Moving Average (LWMA) 3. Exponential Moving Average (EMA)
Oscillator Indicators
Technical Indicators
1. Momentum 2. Relative Strength Index (RSI) 3. Rate of Change (ROC) 4. Moving Average Convergence and Divergence (MACD)
Sentiment Indicators 1. Contrary Opinion Theory
Source: Prepared by the researcher. From the foregoing, the author conclude that the various tools of each technique which Individual investors and Professionals can use them to predict the stock value and make a buy or sell stock decision. Literature Review There are there are a few previous studies, which focused on trading methods compared with its others in financial markets. However, there are different two viewpoints where; 1. Studies illustrate the comparison between fundamental analysis and technical analysis following the analysis methodology based on the survey study: In a foreign exchange markets, Lui and Mole, (1998) and Oberlechner, (2001) reached the investors depended on both the technical analysis and fundamental analysis to forecast the movement of the exchange rate in the future on the various range. However, the results show that the investors who depend on the short-term, they use technical analysis tools further than fundamental analysis tools. In a contrast, Cohen, et al., (2011) reached there are no significant differences between professionals and non-professionals investors who depending on the fundamental and technical analysis techniques. In a different context, Venkatesh and Tyagi, (2011) found that difference between the methods used in the evaluation in small, medium and large sized enterprises, where Venkatesh and Tyagi illustrated that some sectors as; Iron & Steel, Fertilizer, Pharmacy and Petrol industry depending on fundamental analysis method as a strategic for evaluation for companies. On the other hand, in the modern sectors such as; Communications, Mortgages, Information Technology and Feeding using technical analysis techniques as a strategic method in their evaluation.
2. Comparative studies between the fundamental analysis and technical analysis following the analysis methodology based on the secondary data: Bettman, et al., (2009) aimed to study the techniques of fundamental analysis and technical analysis are complementary or alternative?. The results show that the technical analysis approach is superior to fundamental analysis approach, and also they concluded that when the two models are combined, investors get less predictive ability stock value. Because, they reached the both techniques (fundamental and technical analysis) work well separately. On the other hand, Lee & Shih (2010) reached the complementary nature of the technical and fundamental analysis shows that it is superior to the technical analysis only through getting more significant returns for both of the grows and stock value. In a contrast context, there are two studies provided by Neely, et al., (2010) and Moosa & Li (2011) aimed to compare between the fundamental analysis and technical analysis to reach which one of them is more credible than other?. They concluded that the technical analysis method is more effective than fundamental analysis method, because the behavioral effects have a major role in explaining forecasting the stock value over business cycle. Finally Wafi, et al., (2015a) attempted to compare between technical analysis rules and fundamental analysis rules to reach the effective technique can be used in Egyptian Stock Exchange. By depending on secondary data (empirical study) and applied on 37 companies in Egyptian market. They concluded that the technical analysis tools are more effective than fundamental analysis tools in predict a stock value in Egypt. This is consistent with the findings of the Neely, et al., (2010) and Moosa & Li (2011). However, in the current research, the author does not aim to define which of the two investment techniques (Fundamental or Technical) is used to predict stock value (return or price) as Wafi, et al., (2015a). But, the researcher attempt to identify to what extent these investment tools are used by investors in Egyptian stock market. In addition, the author want to examine whether different sets of tools are used to buy a stock and to sell it. Moreover, the researcher also will examine the effect of the capital market experience of investors who use investment tools on the decision of buy or sell stock in Egyptian stock market. Research Problem The study aims to solve the study problem, which can be formulated as follows: Which of the analysis tools of stock techniques (technical analysis or fundamental analysis) is preferred by investors when they used to buy or sell stock in the Egyptian Stock Market? Hypotheses The study hypotheses are presented in the following sub-hypotheses:
H1: There is a significant difference between investors' preferences to investment tools (fundamental or technical) when they make a buy stock decision. H2: There is a significant difference between investors' preferences to investment tools (fundamental or technical) when they make a sell stock decision. H3: There is a significant difference between the experience of investors in the capital market and their preferences for investment tools in the case of a buy decision. H4: There is a significant difference between the experience of investors in the capital market and their preferences for investment tools in the case of a sell decision. H5: There is no significant difference between males and females who used fundamental analysis tools. H6: There is no significant difference between males and females who used technical analysis tools. H7: There is a significant difference between professional investors (portfolio managers) and individual investors who used Fundamental Analysis when they buy stocks. H8: There is a significant difference between professional investors (portfolio managers) and individual investors who used Fundamental Analysis when they sell stocks. H9: There is a significant difference between professional investors (portfolio managers) and individual investors who used Technical Analysis when they buy stocks. H10: There is a significant difference between professional investors (portfolio managers) and individual investors who used Technical Analysis when they sell stocks. Methodology, Data, and Survey design In order to test the hypothesis, the author will depend on a survey study. Therefore, the researcher will gather the data for this study in the framework of a computerized and paper survey, consisting of two stages; A. The author will conduct online survey via one or more of the widely recognized websites for being regularly visited by market investors and also the author will conduct via one or more of social websites. B. The author will meet and ask investors (professionals and nonprofessionals) in some investment securities' firms which will be selected by random. The author will ask all the respondents to indicate their gender, age, and number of years of active experience in the capital market. Table No. 1 (in Appendix. 1) shows the survey questionnaire.
The survey questionnaire consisted of (30) questions, "10" questions involving fundamental analysis techniques and "20" questions related to technical analysis techniques. In each question, participants will be asked to rate appropriateness of a statement on a Likert scale between 1 (strongly disagree) and 5 (strongly agree). Contribution of Paper This study aims to compare its results to the study which provided by Wafi, et al., (2015a) to ensure that the results of the empirical study offered by Wafi, et al., (2015a) which depended on secondary data may be agree or disagree with the current study which will depend on survey study. By other words, the study provided by Wafi, et al., (2015a) reached the technical analysis rules are more credible than fundamental analysis rules for forecasting the stock value in Egyptian Exchange Market. In this current research aims to test which investment tools preferred by individual investors (fundamental or technical analysis)?. The results of this current research will emphasize or not that the investors used to the same technique which concluded by Wafi, et al., (2015a). So, the current research will end the arguments in this area, specially, in Egyptian Stock Market. References Bauman, P. M. (1996). "A review of Fundamental Analysis Research in Accounting", Journal of Accounting Literature, 15, 1 - 33. Bernard, V. L. (1994). "Accounting-based valuation methods, determinants of market-to-book ratios, and implications for financial statements analysis". Working paper. (University of Michigan. Business School. Faculty Research). No. 9401. Bettman, L. J., Sault, J. S. & Schultz, L. E. (2009). "Fundamental and Technical analysis: Substitutes or complements?" Accounting and finance. 49(1), 21–36. Bodie, Z., Kan, A. and Marcus, J. (2009). "Investments". 8th Ed. McGraw-Hill Irwin. Brooks, GJ. (2006). "Mastering Technical analysis- Using the tools of technical analysis for profitable treding", McGraw-Hill, Inc. Chen, J. (2010). "Essentials of Technical Analysis for Financial Markets", John Wiley & sons, Inc. Cohen, G., Kudryavtsev, A & Hon, SS. (2011). "Stock market analysis in practice: ISIT technical or fundamental?", Journal of Applied Finance & Banking, 1(3), 125–138. De Bondt, W.F.M, and Thaler, R.H. (1990), "Do security analysts overreact?", American Economic Review, 80, 52-57. Easton, G., Taylor, P, Shroff and Sougiannis, T. (2002). "Using forecast of earnings to simultaneously estimate growth and the rate of return on equity investment", Journal of Accounting Research, 40, 657-676. Edwards, D & Magee, J. (2007), "Technical analysis of stock trends", 9th edition, CRC press, (Bassetti. W.H.C. editors). Fisher, D. E. and Jordan, R. J., (1995). "Security Analysis and Portfolio Management". 6th Ed. Prentice-Hall, New York, N.Y.
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