There are 2 popular methods people use to help them decide where and when to invest their money: technical and fundamental analyses.
Each one appeals to different types of investors based on their preferences, skill level, and goals. Read on to learn more about these methods and find out which one may suit your situation.
Fundamental analysis: Looking at the “real” value
Investors that perform fundamental analysis want to know the intrinsic or “real” value of a company. They look at different underlying factors to evaluate its current situation and prospects for growth.
Here are some questions they aim to answer:
1. Is the company doing well financially?
You can read financial statements like earnings reports to know if a company is profitable and has a good track record when it comes to managing finances.
Investors usually check for increases or decreases in revenue, expenses, and debt over time. These figures can also tell you if a company is hitting its targets and if it has met and is meeting the expectations of the investing public.
2. Are there external factors that can affect performance?
A company's operations can be impacted by factors beyond the control of its leadership. These include changes in interest rates, inflation rates, and geopolitical events, among others.
3. Does the company have a competitive advantage?
To know if a company is poised for long-term growth, investors consider how it fares against its competitors and whether it has an edge over industry peers.
Good leadership can also be an advantage since it can help set a company up for success in the long run.
Technical analysis: Keeping an eye on trends
To perform technical analysis, you need monitor statistical trends and market activity and interpret them properly to predict the future price of a security, like a company’s stock.
Technical analysts believe that all relevant information about a security is already reflected in its price. That’s why they may be less concerned about the underlying causes of price movements.
They typically seek to answer these questions:
1. What are the recent and current price trends?
Analysts use many different indicators like trading volume, support and resistance levels, and price charts to detect trends and find buying and selling opportunities.
2. What do the different indicators suggest about future price movements?
Investors don’t need to use every indicator available to them at the same time. They may pick a few types or combine different ones to forecast whether prices will go up, down, or stay within a certain range.
These predictions will help them choose which securities to buy or sell and decide when to make those transactions.
They may also have exit strategies in place to minimize loss in case things don’t go the way they predicted.
Choosing the right approach for you
Here are some questions to ask when deciding whether technical or fundamental analysis is better for you:
1. What are your goals?
When your goals are clearly defined, you’ll know how much money you’ll need and how long you should keep it in to possibly reach it.
If you plan to buy and hold an asset for many years, fundamental analysis might give you more confidence about its potential to grow over the long term.
Short-term investors or traders may prefer technical analysis since this method can allow them to take advantage of rapid changes in price.
2. How much risk can you take?
Technical analysis is typically associated with fast-paced trading, which involves taking on significant risk. It’s mainly because the rise and fall of prices may not be as predictable as you’d expect.
When you need to act quickly, you may also face increased risk of making poor decisions due to emotional investing.
On the other hand, fundamental analysis focuses more on long-term value. It may be a better match for passive investors or those who have a lower risk tolerance.
3. How much time can you spend on research?
Both methods require you to make time for research and digest a lot of information. When doing technical analysis, you’ll likely need to monitor charts and other indicators frequently, especially while the markets are open.
Meanwhile, fundamental analysis can involve deeper research into a company’s financials, larger industry trends, and economic factors. One advantage is that you can do this at your own pace.
4. What’s your skill and experience level?
You’ll need a good understanding of price trends, patterns, and charts to be able to separate signal from noise as a technical analyst.
When looking at a company’s fundamentals, you must know your way around financial statements and have some basic knowledge of economic concepts.
It’s important to note that each method has its own strengths and weaknesses, and neither can guarantee success. Some investors use a combination of both in an attempt to cover all the bases.
However, that may require considerable experience. At the end of the day, your choice may boil down to the type of investor you are and the information you need to feel confident in your decisions.
You can find investment companies and stock brokerage firms that help their clients with both fundamental and technical analyses.
They provide support through research reports and other tools that can help you with your own analysis.
