On Wall Street, there is no absence of people who believe that they have the answer. Tried and true traditions resulting in a lot of money being made drive these people to proclaim that they know the secret that all of us have missed for many years. The truth, as everybody knows, is that a strategy is only as good as the education level, desire to succeed, and work ethic of the person using it.
Fundamental Analysis vs Technical Analysis: How Do You Invest?
The two most common methods for analyzing stocks are fundamental analysis and technical analysis. While most people employ a little bit of both techniques, each side believes that their method holds the secret to financial success if more people would just take the time to learn it.
Fundamental analysts are realists. They look at the real world factors that may affect a stock’s movement. How would a hurricane in the Gulf of Mexico affect the price of an oil stock? How would a well respected CEO’s departure from his company have an effect on the share price of this same company? And how would an analyst’s upgrade of a stock generate more investor confidence? Any of these factors, along with many more, are what fundamental analysts look at when they evaluate the quality of a given stock.
In addition, these analysts look at balance sheets, price earnings ratios (P/E ratios), and basic chart trends so if you’re thinking that you can ignore those confusing charts completely, fundamental analysts would disagree with you. Fundamental analysts are concerned with stocks that look overvalued, and they may reference and read stock charts to make that determination. When you think of fundamental analysts, remember that they are the realists.
Technical analysts are different. They found their roots in the Dow Theory, created by a series of newspaper articles at the turn of the 20th century and later developed into what we today call stock technical analysis. This theory states that the market moves in certain patterns and these movements can be predicted with a confident degree of certainty. By reading the charts and applying some statistical analysis using trend lines and averages, investment decisions can be made.
If you don’t like analyzing charts and graphs, you probably won’t have much of an interest in this form of analysis. The good news though, is that many online brokers and online trading websites can help you analyze such charts so don’t think you don’t have a chance to use charts to your advantage.
In large part, numerical patterns are used to calculate the market’s direction. You will hear words like resistance, support, reverse head and shoulders, and many other cryptic terms that technical analysts use to generate patterns in the charts.
While there are purists on both sides, most investors are a mix of both of these methods. As we said earlier, many fundamental analysts look at stock charts. In fact, a more advanced statistic known as the moving average is used by nearly all investors to make decisions.
Most technical analysts also understand that the market is made up of people and people don’t always make technical choices. People get scared, excited, and irrational at times and because of this, their investment patterns reflect their humanity. There is no technical indicator that can chart those moves.
As you decide which of these strategies you’d like to pursue, remember that each method has useful characteristics for all investors. As a savvy investor, you’ll find that all kinds of information can prove to be quite useful for your purposes.