Investing: Fundamental Analysis vs. Technical Analysis

Email  Print Print  

Wall StreetIf you are interested in investing, you know that it’s important to find a way of evaluating your potential investments so that you are able to choose what is most likely to provide you with the best chance of a reasonable return.

But how can you determine which investments are likely to provide you with the highest potential performance? There are two main types of analysis that you can use as you evaluate investments: fundamental and technical.

Fundamental Analysis

The first type of analysis deals with the “big picture” items that rely on the basics of an investment. Fundamental analysis relies at looking at underlying factors that can help you create a picture of the investment’s potential staying power. Fundamental analysis is especially effective if you are looking for value investments likely to weather economic cycles and result in long-term success.

Some of the factors considered in fundamental analysis include:

  • Price-to-earnings ratio
  • Price-to-book ratio
  • Profit margins
  • Balance sheet information
  • Potential for growth
  • Comparisons to the performances of similar assets
  • Management competency
  • The political situation in the country
  • Economic conditions

When looking at an investment on a fundamental level, it’s about looking at how strong the asset is now, and how strong it is likely to be in the future.

This doesn’t mean that an asset will always perform well. In some cases, an investment will drop due to market conditions. If a stock is falling along with the rest of the market, it doesn’t mean that the investment is a loser. Take a look at the fundamentals. If the fundamentals are strong, there is a good chance that the stock will recover from the current market turmoil, and that it will perform well in the future. All investments experience setbacks. When you use fundamental analysis to choose assets with likely staying power, though, you don’t have to worry about timing the market, since your portfolio is likely to recover.

Technical Analysis

Technical analysis is a little bit different. Instead of looking at the characteristics of a particular investment, technical analysis is concerned mainly with the price action.

Every investment has a price history. With technical analysis, it’s all about the numbers, and looking for patterns in the performance. Those who subscribe to technical analysis insist that it’s possible to use the performance of an investment to make predictions about what is likely to happen next. Patterns in how prices behave, whether you are looking at stocks, commodities, or currencies, are used to make decisions.

When using technical analysis, you need to understand what different patterns indicate. You look at charts that display price performance, and then decide when the best time to enter a trade is (usually when it’s near a bottom and poised to head higher) and when you should exit a trade (often when the pattern indicates that a drop is imminent).

Technical analysis is often used by day traders, options traders, and currency traders. Technical analysis is popular amongst those who are making short-term trading options, and trying to make money quickly. It can be a little more difficult to get the hang of using technical analysis to good effect than it is to become adept at understanding what fundamentals make a good long-term investment.

What do you think? Do you prefer fundamental analysis or technical analysis?

(Photo: Emmanuel Huybrechts)

{ 8 comments, please add your thoughts now! }

Related Posts

RSS Subscribe Like this article? Get all the latest articles sent to your email for free every day. Enter your email address and click "Subscribe." Your email will only be used for this daily subscription and you can unsubscribe anytime.

8 Responses to “Investing: Fundamental Analysis vs. Technical Analysis”

  1. I’m curious to know if academics have validated as effective any of the methods used by technical analysts. Does anyone know of any academic study that concludes a particular technical analysis method can consistently forecast stock prices? Thanks.

  2. Jim says:

    I really think it’s all about fundamental, fundamental,and fundamental!

  3. Huskervball says:

    I think that Fundamental Analysis carries the day.

    • I like to combine the two. Use fundamental analysis to filter out the good stocks, then use technical analysis to determine attractive prices to setup limit orders to scoop up these promising securities.

  4. Roy says:

    Personally I think there’s a place for both. Technical analysis has certainly worked recently in some currency pairs, with the GB/USD a clear example. However, fundamentals will always come into play as will, sadly, market manipulation.

    In the 90’s I focused a lot on small cap stocks, where technical analysis would be no use whatsoever. Even fundamentals can be confusing in “penny shares” as a change in fundamentals can be exaggerated in terms of price reaction. I had one investment I had selected purely on fundamentals, especially the CEO, where a bit of negative news just a week later wiped out 80% of the value in minutes. Too fast to trigger a stop loss in a restricted market for the shares, I had to investigate what the “shock” was. Fortunately it was an accounting issue with an acquired company which traders did not understand, but I did. I knew the reaction was way over the top (or bottom in this case) so I kept my nerve and doubled my investment, only this time the same amount bought over 5 times as many shares. By the next year the price had recovered to where it was when I first bought.

  5. Claes says:

    I’m personally a fan of fundamental analysis, but I know of at least one whitepaper that does seem to validate the use of technicals:
    Money quote: “Fund managers who employed technical analysis, which relies on the study of price and volume data to predict the future direction of stocks and other financial instruments, delivered higher returns than those who did not”

  6. finula says:

    Useful Information

Please Leave a Reply
Bargaineering Comment Policy

Previous Article: «
Next Article: »
Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2016 by All rights reserved.