In today’s financial word, two main types of analysis exist when you are looking at and trying to understand the market – technical analysis and fundamental analysis. Understanding both methods, and the differences between them, is very important for investors. They help traders to get a firmer grasp on researching and forecasting growth trends in stocks.
What Is Technical Analysis?
This analysis type requires the study of historical statistics that include both volume and prices. Those who ascribe to this method will utilize stock charts as a means to find trends. They find and track such trends, which gives them an idea of what a stock will likely do in the future. Technical analysts do not look at the company’s “fundamentals,” which we will discuss below. Instead, they only to refer to the stock’s price and gather the information they need from the stock charts.
What Is Fundamental Analysis?
Fundamental analysis takes a different approach. This method requires investors to evaluate securities so they can measure the intrinsic value of a stock. This type of analyst will look at the larger picture, rather than just the behavior of certain stocks. They consider the overall state of the economy as well as conditions in various industries that have an effect on the stock. They also look at the management structure of the companies they are considering to invest with and their overall financial condition.
The fundamental analyst looks at the income statement, cash flow statement, and balance sheet of a company to determine its value at an intrinsic level. These elements are generally seen to be more significant than the historical performance of the stock. If they find that the stock is trading below the intrinsic value, then it is a worthwhile investment.
Which Option Is Best?
Both methods have their advantages and it comes down to the investment style of each individual. Traders can be successful with either of these options, so there is no one superior choice.
The Time Difference
When it comes to the amount of time it takes to analyze a stock, the fundamental approach tends to take more time in comparison to technical analysis. Technical analysis can occur over days, weeks, and in some cases, minutes. Fundamental analysts will look at data that covers a number of years and parse the information to make their decision on whether it is a good investment or not. This is largely due to how information is released. Prices and subsequent price changes are released daily; however, the information that a fundamental analyst uses is released on a quarterly or yearly basis.