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Fundamental vs Technical Investing
The two primary styles to go about investing in the stock market are Fundamental and Technical Analysis. They are the basis of rationale in the markets. Whether you are an investor or a trader, these are the two styles of choice to approach the stock market. So if you are ever at a point in your life where you have made the decision to begin investing and want to take hold of your own investment decisions, your choice will be Fundamental or Technical analysis.
Then there's gambling analysis. You
grab a dart, stick the stock section of your local newspaper to the wall,
take a step back, and throw the dart at the newspaper. Then you check where
your dart lands and take the first opportunity to invest in the company the
dart lands on! ... kidding of course.
A book by the father of fundamental value investing. A must for all investors.
Fundamental Analysts believe in the underlying financial strength of a company. How can you determine financial strength? From the company's financial statements of course! (and past financial statements as well!).
The financial statements contain the Income Statement, the Balance Sheet, and the Cash Flow Statement. These provide the fundamental analyst with a window into the financial health of a company. A fundamentalist uses the information from the financial statements to also determine the P/E ratio, profit margins of the company, the current ratio, return on equity, return on assets, and many other factors which aid the investor in making an investment decision.
If you searched, for example, Yahoo Finance for a stock, it will give you some information such as the P/E ratio, Earnings per Share ratio, and Dividend - all this information is pulled from the company's financial statements! Yahoo Finance doesn't just make these numbers up! Many times, it's better to look at a company's recently released financial statements (publicly traded companies must release their financial statements every quarter) and determine any ratios or margins yourself just to be sure.
The nation's economic climate is also a factor for fundamental analysts and their investment decisions. Many times, fundamental analysts will question why the Federal Reserve might be raising or lowering interest rates. Fundamentalists also keep a close eye on any new regulations or reforms the government may impose on an industry. Economic factors can never be ignored, however, the financial strength of a company has the ability to remove doubts from outside factors.
Fundamental Analysis does not guarantee future results no
matter how low a company's long-term debt is or how great the
net profits are. It is up to the investor to be diligent when making their
investment decisions - diligence in the form of financial
Fundamental and Technical Investor Books
Highest ranked Technical Analysis book on Amazon.com!
The technical trader believes future performance of a stock is based on one thing: the company's ongoing "charts." Charts can be anything from the company's share price occurring during the day, moving averages, volume, relative strength index, and many more. There are also some really complex charts from really complex formulas as well. Technical Analysts then use these charts believing that all information about a company's financial performance has already been factored into the company's market price (share price). So, when a technical analyst looks at charts, there's no need to look at financial statements or economic conditions.
In essence, technical analysis is the
ability to analyze a stock's charts in order to predict future price moves. These analysts want to take advantage of price moves and turn them into profits.
When you hear of analysts on television talking about breaking
points, or double dips, or double tops, or resistance lines, or moving
averages, and etc. they are primarily -technical- analysts. They are
for patterns in order to provide viewers with a forecast.
Technical analysts could be looking at the charts of any company. There are no specific companies they prefer. In fact, most technical analysts do not know the name of the company their even interested in - they see the company as a bunch of letters commonly known as the company's stock symbol. The only thing that matters is how the stock's chart looks and if there is an emerging pattern they can take advantage of. Technical analysts also look for companies with the most volatility in order to try and profit from the price swings, therefore their job can be very tedious and complex. Subdivisions of technical analysis includes swing, momentum, or positions trading.
Technical analysis does not guarantee positive future results.
So which is better?
These two investment styles go into a lot further detail then the short article I've written here. Analysts from each style are sometimes at war with each other over who is more accurate
Some believe one style has more risk then the other. Essentially, both styles carry risks as with all other investments. Some people blend the styles together and try to use both in an attempt to maximize profitability - however this hasn't been tested (I don't think it can) and it may or not guarantee success either.
In the end, it is up to the investor or trader to select their investment style of choice. It depends on whichever style makes you more comfortable. To become comfortable with either style, you have to read books, read articles, and learn from mentors and coaches. You have to want it enough to read the material or else it will bore you to death!
Again, remember that all investments carry risk, and mitigating that risk can only be achieved by making use of the information you have.