Investing is a subject that is often debated, and even the most seasoned investors will tell you their opinion on what the best approach to investing is. While fundamental analysis focuses on the financial data and market conditions surrounding a company (mostly quantitative), technical analysis includes the price and volume of certain stocks, which can help predict a stock's movement (mostly qualitative).
Both ways of analyzing stocks are important because they offer different insights into a company. In this article, we look at the importance of using both fundamental and technical analysis to help you gain insight into a company's performance.
Fundamental analysis studies economic factors that drive a stock's price. These factors include the company's financial statements, management, and competitive environment. Fundamental analysts believe stocks should be bought when trading at a discount to their intrinsic value.
Investors who use fundamental analysis typically perform extensive research before making an investment decision to determine whether or not an asset is worth buying. This research includes studying current and historical market data, analyzing balance sheets and income statements, and reading news stories about the companies in question.
Conducting this type of analysis requires a high level of expertise that only some possess, which is why most investors choose to hire professionals who specialize in this area of investing.
Technical analysis is the study of market behavior through price charts. Some traders use charts to identify trends, chart patterns, and signals. The charting tools used by technical analysts include bar charts, line charts, point-and-figure charts, candlestick charts, and others.
Technical analysts use these tools to determine if an asset's price is currently overbought or oversold. They also look at moving averages and relative strength index (RSI) indicators to determine if a trend is likely to continue or reverse.
Technical analysts often use support and resistance levels to help them determine when to buy or sell an asset. These levels are created by drawing trendlines on a chart that connect price highs or lows over time. Once the price reaches one of these lines, it can be expected to bounce off the line or continue downward until it hits another level of support or resistance.
When using technical analysis for investment purposes, it's important to remember that past performance does not guarantee future results. For example, if an indicator predicted a downturn in the stock market last year but prices continued to rise, it would be inaccurate for an investor to use this indicator alone.
There are many similarities between the two types of analysis. Here are some of them:
Both tools are useful but differ significantly in how they approach the market.
Fundamental and technical analysis are two approaches to investment and asset management. Fundamental analysts rely on data related to an underlying financial instrument, such as the company that issued the security and the market in which it trades. They also consider their research when making investment decisions. Some fundamental analysts will conduct their quantitative research, such as market research or financial modeling, to identify undervalued assets or weak points. If you want to get started on the road to long-term wealth, take a look at our Investing 101 course which gives you the tools to get started. Have any questions? Feel free to contact our team.