Introduction To Stock Analysis-Fundamental And Technical Analysis
The stock market can be tricky. With prices of stocks in companies changing almost every minute, an informed and rational decision needs to be made by any investor before buying stocks. A lot of resources are available for investors, both newbies and experts, to help them make informed choices. At the heart of deciding where to invest, is in-depth research and making predictions on possible future trends based on the findings.
Different Types Of Trading
There are various niches in which an investor may opt to invest.
- Swing or Day Trading
- Technical Trading
- Fundamental Trading
Fundamental analysis looks at various factors that impact future stock prices. It mainly focuses on measuring the intrinsic value of a share, as a way of evaluating securities. A lot of data has to be analysed to determine the value of the security. Some of this data includes financial statements, business concepts, management competition etc.
Technical analysis is a form of prediction of changes in stock prices based on analysing data collected from the past. It does not analyse the financial performance of a business or company but rather, it focuses on the price and volume to identify opportunities to trade.
Technical analysis is commonly used by traders and people who are investing short term. It uses past data in the form of charts to predict future prices of shares.
- The nature of the technical and fundamental analysis is quite different. Naturally, their analysis would require the use of different mechanisms.
- Fundamental analysis requires the use of metrics and ratios. It analyses data both from the past and present in detail including a company’s financial statements. These details will depict how the company is performing and its general growth. Ratios will be used to determine whether the prices of stocks are undervalued or overvalued.
- Technical analysis is based on data collected from the past. The data is presented in charts and these are studied to see trends and patterns from the past. They can also use indicators that will monitor price movements and also market momentum.
Understanding The Differences Between Technical And Fundamental Analysis
- The difference between the two is mainly determined by the price and value of stocks. Fundamentals focus primarily on the intrinsic value of the business and the stocks before investing while technicals consider the price movements to determine the exact entry and points within a market.
- Fundamentals seek long term investments while technical seeks a short term investment or trade.
- They also have different research periods. Fundamentals analysis takes longer because of the volume of data, both past and present, that it has to go through while technical analysis takes a shorter time.
- The two forms of analysis have different objectives. Fundamentals tend to focus on investing while technicals tend to focus more on trading and making profits in the short term.
- Fundamental analysis focuses on both past and present data while technical data looks at past data only.
- Fundamental analysis tends to look at qualitative values of a business i.e. the financial statements while technical analysis focuses more on trends and patterns of price movements as depicted in charts.
Combing Fundamental and Technical Analysis
On their own, they are powerful tools in the trading world but together the possibilities are even greater.
This is where the technique of value assessment and monitoring price momentum are combined. This allows investors to trade low but with strong momentum in the price.
You can opt to create a list of stocks you would like to invest in using fundamental analysis techniques and then use technical analysis to determine whether or not to buy them based on price movements.
Strategic Entry and Exits
Using technical analysis techniques can come in handy when deciding when to buy or hold out long term investment stocks. This is where you combine intrinsic value with the strategic entry and exit points with the market.
The two forms of analysis each have their advantages and disadvantages. Even though they use very different techniques in the analysis of data and have varying objectives they have both served many investors over the years. Choosing a method of analysis should mainly be based on your needs and whether your aim is a long term or shorter investment. Alternatively, you can choose to combine the two methods.