Financial statements or stock charts?
Before investing in a company share, it is pivotal to research the company and the market first. There are two famous types of analysis that we can employ to evaluate a share: fundamental analysis and technical analysis.
Again, quoting Investopedia:
“Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the security’s value, including macroeconomic factors such as the overall economy and industry conditions, and microeconomic factors such as financial conditions and company management. The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security’s current price, thus indicating whether the security is undervalued or overvalued.
(Investopedia Definition Link)
Technical analysis is a trading tool employed to evaluate securities and attempt to forecast their future movement by analyzing statistics gathered from trading activity, such as price movement and volume. Unlike fundamental analysts who attempt to evaluate a security’s intrinsic value, technical analysts focus on charts of price movement and various analytical tools to evaluate a security’s strength or weakness and forecast future price changes.
(Investopedia Definition Link)”
Fundamental vs Technical
Below is a table of comparison based on my interpretation:
Analysis | Fundamental | Technical |
Source of information | Annual reports (main source), government reports, economic reports | Technical charts |
Time horizon | Longer | Shorter |
Factors considered | Microeconomic and microeconomic | Past market activity and stock price trend |
Nature | Investor | Trader |
Explanation
If you are a pure technical analyst, you are more like a trader. You will depend on the stock charts to identify the points of entry. The underlying strengths and weaknesses of the company are none of your concern. Once the chart tells you that it is time to exit, you will sell the shares without questioning the reason. Why? Because the market told you to do so! By using this technique, you could execute buy and sell orders with almost any stock rapidly. That is the reason it is linked to trading.
Unlike technical analysis, fundamental analysis requires a lot more time. The practitioners will first scrutinize the annual reports of the company that they are interested in. They may then factor in the macroeconomic environments and come up with an intrinsic price for the company. They will only buy the share if the price is below this intrinsic price. Furthermore, the holding period can be long as they have the confidence that this company will do well in the future unless proven otherwise. Thus, they behave more like investors.
So, is it possible to utilize both types of analysis in your investment journey? The answer is yes. For example, you have identified a certain stock through fundamental analysis and the share price is below your estimated intrinsic value. However, the share price is fluctuating quite wildly and you don’t know when you should buy the share. In this case, you may employ technical analysis to find a point of entry so that you will hopefully buy it at the right price and the right time. Even if you are confident with the future of a company, no one will relish the feeling when the price drops sharply after purchase of its stock. Thus, if used properly, both techniques can complement each other. However, if you really want to combine both techniques, you will to find a way that suits you the most.
As for me, I employ fundamental analysis for my investment decision. It is more suitable to my personality and I hold a long term horizon for my investments after all.
So which one is for you? Fundamental? Technical? A mixture of both? It is entirely up to you. But no matter which method you choose to use, the important point is that you know what you are doing and have devised a system to follow.