Fundamental and technical analysis are two of the most commonly used methodologies to study markets and securities. How and when you use them is a matter of personal preference. Both methods provide detailed insights into a company’s underlying business as well as its position in the broader economy. In simple words, fundamental analysis focuses on the quality of the stock, whereas technical analysis is more about the study of market trends. Let’s break it down further.
Fundamental Analysis
Fundamental analysis is a great tool for determining the growth potential of a company. It relies on metrics such as P/E ratio, dividend yield, debt-to-equity ratio, ROE (return on equity), etc. to identify stocks fitting certain criteria. Historically, investors have used fundamental analysis for long-term investments as it offers detailed reports on every financial aspect of a company. Their primary tools include:
Financial Statements
Economic indicators
Interest rates
News and updates
Technical Analysis
Technical analysis, on the other hand, bypasses the fundamental evaluation of a company and instead hunts for pre-studied trends that might foretell future price shifts and volume changes. Investors review historical data and volumes to determine how the price and volumes will shift over time. The main tools used here are:
Technical indicators
Volume analysis
Stock chart analysis
Studying support and resistance
Trend analysis
So, is one better than the other?
One might argue that exploiting market trends (what technical analysis does) to profit isn’t very sustainable, but reality says otherwise. Ideally, you want to combine fundamental and technical analysis as leaving out one might cause you to miss important clues. Begin by assessing intrinsic values such as financial statements and when designing an exit strategy, you can rely on technical analysis.
This approach might give you a more realistic picture of the market and its behavior allowing you to fine-tune your expectations and strategy. Nevertheless, it’s always better to have more information than less whether you eventually end up using or not. Not to mention, these techniques will enhance your market knowledge over time.
Whether you are a growth or value investor, market study can be a tricky joint these days given how diverse the market has become. Furthermore, years of accumulated data gives us an edge compared to a decade ago when most companies were in their infancy. What other tools do you use to identify stocks? Let’s hear your thoughts!
Technical analysis is good right before a buying decision but they are wrong more than often for short investments. Learning your industry better will help you a lot more than technical analysis.