While both equally important, technical and fundamental stock analysis are the two main methods when it comes to properly analyzing the stock markets.
In simple terms, technical analysis looks at the price movement of a security and uses this data to predict future price movements. Whereas fundamental analysis studies economic and financial factors that influence a business.
Let’s further investigate the specifics of how these two approaches differ and how technical and fundamental analysis can be used together.
Technical analysts typically starts with analyzing charts, while fundamental analysts start with a company’s financial statements.
fundamental analysts try to determine a company’s value by looking at its income statement, balance sheet, and cash flow statement. In accounting terms, the analyst tries to measure the intrinsic value of a company by discounting the value of future projected cash flows to a net present value. A stock price that trades below a company’s intrinsic value is considered a good investment opportunity and vice versa.
Additionally, fundamental analysis takes a long-term approach to investing compared to the short-term approach taken by technical analysis. While stock charts can be delimited in weeks, days, or even minutes, fundamental analysis often looks at data over multiple quarters or years.
Fundamentally-focused investors often trade over a longer term because it takes time before a company’s intrinsic value is reflected in the market.
Technical analysts believe that there’s no reason to analyze a company’s financial statements since the stock price already includes all relevant information. Instead, the analyst focuses on analyzing the stock chart itself for hints into where the price may be headed by past performance. This approach is used because often financial statements don’t always predict an accurate value of a stock. How many times as a company released a positive earnings report only to see shares drop the next trading day. Take TSLA for example, currently they are losing more money then they are making but the stock price keeps increasing. That’s because of the social following, projected future profits, volume and publicity of Tesla.
Technical analysis and fundamental analysis usually have different goals in mind. Technical analysts try to identify many short- to medium-term trades where they can flip a stock, while fundamental analysts try to make long-term investments in a stock’s underlying business. A good way to conceptualize the difference is to compare it to someone buying a home to flip versus someone that’s buying a home to live in for years to come.
Can They Co-Exist?
Technical analysis and fundamental analysis are often seen as opposing approaches to analyzing securities, but many investors have experienced success by combining the two techniques. For example, an investor may use fundamental analysis to identify an undervalued stock and use technical analysis to find a specific entry and exit point for the position.
Alternatively, some primarily technical traders will analyze fundamentals to support their trade. For example, a trader may be eyeing a breakout near an earnings report and look at the fundamentals to get an idea of whether the stock is likely to beat earnings.