Technical Analysis vs. Fundamental Analysis

<center>(Photo Courtesy: Modrika)</center>

When it comes to analyzing the markets, there are two primary schools of thought, technical analysis, and fundamental analysis. Those who use the technical analysis method, are looking at the price movement of a particular investment and then put this information to use to help them predict the future movement of the stock in question. On the other side of the coin is fundamental analysis in which investors are more interested in the financial and economic factors that affect a business they are interested in. So, let’s take a look at each of these forms of analysis, how they differ, and how they can be used in conjunction with each other.

The Differences Between Fundamental and Technical Analysis
  • Technical Analysts usually start out using charts for their information.
  • Fundamental Analysts usually start out using the company’s financial statements.
  • Technical analysis generally does not involve having to worry about the company in question’s financial statements. Instead, they use the stock price itself as it provides the relevant information needed. The technical analyst relies on analyzing charts to help them determine which direction(s) the stock has been moving over a particular time frame.
  • Fundamental analysis requires the analyst to look at the company’s balance sheet, income statement, and cash flow statement in order to determine their value. This information is used to try and predict future cash flow in reference to the company’s current net worth and to help decide whether or not they will make a sound investment.
Time Is an Issue

Fundamental analysis involves using a long-term approach to investing in that they look at the company’s history and overall financial performance. Some look at individual stocks as being underpriced but will invest with the idea that over the course of time their investment will grow. For this type of investment, you may have to wait for up to several years before you realize an actual return on your investment.

Technical analysis is a far more short-term form of investment involving the use of charts. These charts may cover weeks, days, hours, or even minutes. This makes it possible to buy and sell in shorter time frames, but until you can successfully read and understand these charts, you do put yourself at a higher risk of loss.

Another way to look at this is to say that those who prefer technical analysis are looking at short to medium-term investments that they can flip quickly for a profit. Fundamental analysts prefer to make long-term investments in a company in the hopes the more stable investment pays off at the end. Think of this along with the terms of buying a home to flip (technical analysis) or buying one to live in (fundamental analysis).

There Are Some Who Criticize Technical Analysis

There are many critics of technical analysis because they view the entire concept as invalid. To be honest, the vast majority of Wall Street analysts do tend to place most of their focus on fundamental analysis. But, at the same time, these brokerage houses employ both types of analysts to ensure they can meet the financial needs of both types of investor. It is possible to use a blend of both styles of investing successfully, but many of the brokerage experts tend to frown on this, despite the fact there are benefits to both.