There are two very popular methods of investing in the stock market, fundamental analysis and technical analysis. As with any investment strategy, there are supporters and opponents of every approach. This article explains both methods so that you can clearly understand the process of fundamental analysis versus technical analysis.
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Fundamental analysis is the approach of trying to calculate the intrinsic value of a stock by looking at the fundamental economic factors, called fundamentals, that would affect its value. Relevant factors that are examined include:
- expenses and income
- Growth prospects for the company
- The competitive factors that the company is facing
- Expected return on equity or assets in the industry
The goal of this analysis is to come up with a value for the stock that takes into account all of these underlying factors. Since the approach does not address short-term price and trade fluctuations, this is viewed as a long-term investment approach, as realizing the intrinsic value can take time. Since this affects forward-looking expectations, this method is viewed as an assessment based on both backward and forward-looking information.
Die technische Analyse ist eine Investitionsmethode, die Investitionen rein auf die Marktaktivität, die sie umgibt, bewertet, ohne auf den tatsächlichen business oder den Wert des Unternehmens selbst zu achten.Zu den relevanten Faktoren, die untersucht werden, gehören:
- Historical pricing of the shares
- Trading volume over time
- industry trends
The aim of this analysis is to take advantage of pricing opportunities and trends that can be identified in the market activity around each stock. Since the method is based solely on historical market activity, this is considered a backward-looking method.
Fundamental Analysis vs. Technical Analysis
When it comes to comparing and choosing a methodology between the two, two important considerations must be kept in mind.
First of all, the time horizon of your approach is important to consider. Fundamental analysis is a long-term investment strategy while technical analysis is viewed more as a short-term method. By pricing on intrinsic values, fundamental analysis works towards the long-term value of a company, while technical analysis is short-term oriented by trading on market trends.
Second, you need to consider what your investment approach is. Are you an investor or a trader? Fundamental analysis is investing in companies and relying on their underlying value to increase your returns. Technical analysis is a trading strategy where you want to control the returns from identified trends and opportunities.
Trading can require much more active time and management on the part of the investor, even though large funds invest millions in sophisticated technical analysis trading software. The average individual is likely to be better served by focusing on a fundamental analytical investment strategy.