Fundamental and technical analysis are two different methods that investors and traders use to research and forecast stock prices. In the field of business, there are a lot of different opinions on which method is the best at forecasting stock prices. By the end of this blog post, you will know which method to use and how you could apply it on a daily basis!
What is Fundamental Analysis?
Fundamental analysis evaluate stocks by attempting to measure their “intrinsic value.” Intrinsic value is a measure of what a stock is truly worth.
The intrinsic value of a company is not something that you can Google or Yahoo Finance. Intrinsic value what “you” believe the stock is worth.
By researching more about a industry’s background, you can better estimate how much the stock is truly worth.
(ex: Apple Stock’s intrinsic value might be $130, and the stock price is $133.50). This means that Apple Inc is overvalued because the stock price is greater than the intrinsic value.)
Example of Fundamental Analysis
Above are the financial statistics of Goldman Sachs, one of the largest investment banks in the world.
Investors who advocate for fundamental analysis would typically start at this page in an attempt to understand Goldman Sachs’ performance.
The earnings per share (EPS) is often used by investors to gauge if a company is a good investment. Earnings per share is a value that represents the amount of earnings for one share.
If the EPS of a company is high, it is often a good signal that this company is profitable and worth investing in.
Not only is the EPS indicator easy to understand, it is also accurate when an investor needs to make a decision.
Keep in mind that you can never rely on just the EPS indicator. Always use more than one indicator/signal.
Where to find fundamental information of a company?
Fundamental information of a listed company must be easily accessible because they are obligated to disclose their financials.
Yahoo Finance is my go-to page when I’m looking for fundamental statistics. I enjoy using it because I can quickly navigate and switch between reading a company’s latest news and the fundamental statistics.
Keeping updated with company’s news is one of the most important things to do. Information is incredibly valuable.
The following screenshot is an example of Apple’s financial statistics on Yahoo Finance.
What is Technical Analysis?
Investors use technical analysis to identify stock trends by looking at price charts.
The assumption of using this analysis is all fundamental information of a stock is factored into the price. Therefore, there is no need to look at the balance sheet or income statement of a company.
Understanding all of a company’s fundamental information is overwhelming, which is why investors and traders simply focus on identifying line trends and patterns to predict the future.
What are some popular technical analysis signals?
“Channel lines” are often used by traders to identify price trends. From the figure below, it is fascinating how the price movements are contained between the channel.
Investors can utilize this channel line to predict long-term trends.
The line on top is referred as the “resistance level”, while the bottom is the “support level.”
The support level is a lower boundary that restricts the stock price to fall any lower.
When the price of a stock falls below a certain value, investors are incentivized to purchase more stocks because the price is low. Hence, the increase in demand lifts the stock price up.
On the other hand, when the price rises up to the resistance level, investors are happy to sell their stocks to make a profit. Hence, lowering the price back to an average level.
This process can repeat itself over a long period of time. However, keep in mind that it is not often the case and the stock price can go past the channel line.
This means that there is a “price correction” or a significant event has happened that affects the company.
Where to find these price charts?
Another go-to platform that I use for technical analysis is TradingView. The simplistic and user-friendly design is what attracts me to use it frequently.
Here’s a screenshot of how I would use TradingView.
To access the technical analysis section, you could simply click on the header: “Indicators” button.
Another thing to note is that you could access fundamental statistics of a company on the header button: “Financials.” Therefore, you could actually use TradingView to conduct fundamental and technical analysis.
Which method of analysis should you use?
There are a lot of arguments on whether which method is better. I believe that both methods work just as well and the quality of decision heavily depends on the amount of research and critical thinking you’ve done.
My suggested approach for you is to use both methods. I always start with fundamental analysis in an attempt to understand the nature of the industry and business.
Once I have a good grasp of how this business operates and its past performance, I validate my decision through technical analysis.
If my fundamental analysis predicts that the stock price will be higher next month, I would use the channel lines to crosscheck against my predictions. If both analysis methods point me in the same direction, I would go ahead and execute the trade.
I will be doing another blogpost showing an example of how I would (step by step) execute both analysis on a specific stock.
- Fundamental analysis evaluate stocks by attempting to measure their “intrinsic value.”
- Intrinsic value is a measure of what a stock is truly worth. (ex: Apple Stock’s intrinsic value might be $130, and the stock price is $133.50). This means that Apple Inc is overvalued because the stock price is greater than the intrinsic value.
- Investors use technical analysis to identify stock trends by looking at price charts.
- Both methods should be used for researching and forecasting stock prices.
- Remember! Always start with fundamental analysis, and crosscheck your decision using the technical analysis.
Great Job! Now that you understand further the difference between fundamental and technical analysis, you are one step closer to financial success. What you need to do know is to practice, practice, and practice.
If you’ve learned something from this blog post, let me know what you want me to write about for the next blog post by reaching out to me on Instagram (@Leinvests_) or leave a comment down below.