Private and institutional investors use fundamental analysis as their basis for stock purchases, while short-term traders use technical analysis. Since the risk-reward ratio and time horizons used in investing and trading are very different, it makes sense that these two different methods are employed. Investing and trading are very different animals, and their differences are characterized by the investing processes that fundamental and technical analysis illustrate.
Fundamental analysis relies on economic supply and demand information for the long term and company's financial health in the short term. An investor is informed of these conditions by a stocks annual growth rate, five-year, one-year, and quarterly earnings records, and P/E (price-to-earnings) ratios. Investors reliant on fundamentals are more interested ina stock's performance year to year than they are in market behavior. They do not fret when the market plunges one day and surges another, because their goal is the end result of steady, conservative growth.
Although fundamental analysis provides highly valuable information, many people do not have the time required to research the fundamentals. Taking an hour or more to research one company's new product potential and compare present and past earnings is too much for some, but certain fundamental concepts are simply invaluable. One such statistic is the EPS, or earnings-per-share ranking. Earnings-per-share are calculated by dividing a company's total after-tax profits by the company's number of common shares outstanding. You'll want to compare the EPS of the company in question to other comparable companies in the sector to see how your investment stacks up within the industry.
Technical Analysis is the alternate method of stock research, focused on the study of timing, price fluxuation, and investor sentiment. The most common method of technical analysis is conducted with a chart that shows a stock's price history. We know that the prices represented in the chart do not occur randomly, and it is the collective mindset of all investors that creates prices. These buyers and sellers create patterns because they operate from memory. Different types of charts can be configured to show a wide variety of indicators and everyone has their personal favorites. By analyzing charts and price history a trader can attempt to predict market sentiment and stock price movement, but this is far from an objective science.
Technical analysis and fundamental analysis are the two basic sectors of reasoning that constitute the way investors and traders go about choosing stocks, and you must follow your own financial strengths in determining whether daytrading or investing, and technical or fundamental analysis are right for you.
Well ideally you want to base your stock picks and investments by looking at both fundamentals and technicals. Because a company with strong fundamentals will typically have a longer term increase in price and performance. But at the same time, technicals rarely lie. Even with penny and sub-penny stocks, things like resistance, support, relative strength, MACD crossovers, divergance, price channels, cup and handles... etc a lot of times still signal upcoming changes or trends in the price.
With that being said, there are many companies in the penny and sub-penny realm that have very poor fundamentals, yet people can still make a killing by trading the stock based solely on technicals. But like I mentioned, if the company is broke or spiraling out of control, it typically isn't a long-term investment due to the fundamentals of the company. But the chart and/or price may still follow trends or signals regardless of this in the short-term.
So, that is my trading style and how I approaching picking stocks. If I'm just looking for a really short-term trade to make some quick bucks, I could care less about every detail of the company's history, or every SEC filing or what month it may have recently lost money... if the chart and technical indicators show a possibility to make money, it's good enough for me.
But if I'm looking for a stock to hold for 6 months, a year, maybe longer... then fundamentals play a more important role than the technical aspect, as good fundamentals will lead to long term growth and value of the stock (while still following technical patterns).
So it depends a lot on your investing style, whether you want to hold onto stocks, or get into a stock that is signaling it is ready to break out, and sell it a day or two later.
Both Thomas Mccarthy & Robs are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Thomas Mccarthy has sinced written about articles on various topics from Business and Finance, Finances and Computers and The Internet. Thomas J. McCarthy is an investor, entrepreneur and The Dean of Education at whose perspectives have changed the way people think about money. Thomas Mccarthy's top article generates over 22200 views. to your Favourites.
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