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When it comes to analyzing stocks, there are two main strategies (assuming you ignore things like dart throwing chimps and “hot tips” from your brother in law Tobias)…
Fundamental Analysis vs Technical Analysis.
In this article we’ll take a look at both. You’ll get an easy to understand overview of each and see which one sounds like its more your style.
Fundamental Analysis
Fundamental Analysis is kinda like how we choose who we want to date. If you’re interested in someone you size them up. You take into account things like their looks, personality, who they hang around with, what they wear, their reputation, whether they say yes when you ask them out, etc.
That’s similar to how folks using fundamental analysis determine which stocks to buy and sell. Basically they research the snot out of a company before investing in it.
They look at things like sales, profits and P/E ratios. They consider the management team. They look at the company’s products and/or services. They size up the competition and determine where the company fits in in its industry.
They’ll even look at what’s going on in the world as a whole. They consider how things like wars, recessions, market conditions, etc. may affect the company.
All this research is done to come up with a value of what the company and its stock price is worth in the mind of the analyst.
If they think the company is way undervalued, then they’ll likely buy the stock. If they find it to be overvalued, then they’ll either stay away or, perhaps, short the stock.
Technical Analysis
Technical Analysis is more like predicting the weather. Meteorologists look at historic data, past weather patterns, etc. to come up with their best guesstimate of what the weather will be like later in the day, tomorrow and over the next 10 days.
This is what technical analysts do with stocks. They use stock charts, history price data, common price patterns (with names like the Death Cross, Abandoned Baby and, I’m kid you not, the Vomiting Camel) and more to come up with their best guesstimate of what the price of a stock is going to do in the future.
Technical Analysts (TAs) don’t really care about the fundamentals of a company. Because they largely believe that the current price of a stock reflects all there is to know about a company. And what really moves the price of a stock is the laws of supply and demand and human behavior.
So TAs use their fancy technical analysis tools to try and predict how investors, as a whole, will behave and then the TAs will make their investment decisions accordingly.
Which is Better?
When it comes to the battle between fundamental analysis vs technical analysis, there is no guaranteed right or wrong, better or worse for picking stocks. Warren Buffett uses fundamental analysis. There are plenty of other successful investors that use technical analysis to make boatloads of cash.
So if you wanna get into stock analysis, just pick the one that resonates most to you, learn the ins and outs of it to come up with a plan and get investing!
Oh, and if you can’t decide between the two, ain’t nothing stopping you from using a little of each to make your investment decisions. In fact, the popular CAN SLIM investment strategy borrows from both to make stock buy and sell decisions.
We’ll have plenty more on each of these strategies in the future. But at least you know have a basic understanding of each.
