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Investment basics: what is fundamental analysis and what is technical analysis?

There are two basic approaches in investing when it comes to analysing any security: fundamental analysisand technical analysis. These two are the keys to investment. Fundamental analysis looks at a particular company’s fundamentals like financial statements, net value of assets, equilibrise sheets, gross profits, and price earnings ratios, and is used to determine if the stock being analysed and scrutinised is a long-term investment that will make profits for the stockholder eventually. Technical analysis is different and rather opposite, and focuses instead on the stock price and its concomitant patterns rather than looking at the inner workings of a company. These two approaches to investment will be analyzed here in this article, in depth and more carefully.

What exactly is fundamental analysis? It is the art of looking at the inner workings and basics of a company. Under this school of thought, the fundamentals of the company are what drives it and what makes it profitable. The underlying assumption is that the stock price will reflect either sooner or later the company’s profitability. The more profitable the company – the higher the stock price. It is that simple. Investors using fundamental analysis are certain that the price follows the profitability of the company. In this school of thought, there is less agreement as to the validity of technical analysis as compared to fundamental analysis with its focus on details of the inner workings of the company under scrutiny, but the appeal of technical analysis vis-à-vis fundamental analysis is the intent that one can make a profit faster and quicker than with a buy-and-hold approach, the normal result of fundamental analysis. However it should be noted that it is very hard to actually evaluate a company’s actual worth, and this is a long drawn process that needs a lot of research and reading. You need to know how read all about the company from annual reports and other reports, online and on paper.

Technical analysis is based on different assumptions vis-à-vis fundamental analysis. The assumption is that the market is prefabricated up of a colossal group of speculators behaving in predictable, recurring patterns. They might or might not be rational or fully informed. The challenge for technical analysts is to therefore find these recurring, classifiable patterns in the price movements and to act on them, because of a basic understanding of human psychology and herd mentality. Technical analysis also utilises several tools or techniques to look at trends and patterns on stock price charts. Nevertheless, the goal of all the various tools of technical analysis is always still the same – to actually attempt to predict the price movements of stocks. If the prediction prefabricated is correct, then one can make a lot of money, and vice versa. Stock charts will become an integral part of your life and education.

To conclude, fundamental analysis is the practice of looking at a company’s fundamentals, such as assets, value, profits and income statements, because the assumption is that the stock price will eventually reflect the true “fundamentals” of the company. Technical analysis, its opposite number, is the practice of studying a stock’s past prices and trends in an attempt to determine its future prices and trends, because the assumption is that the patterns to the stock price movements can yield valuable information. One approach is company-oriented and the other is price-oriented. Select one of the two approaches to investment, or maybe try a mixture of both, for yourself and see how you fare for your investments.