Technical vs Fundamental Analysis
Here are two basic approaches to evaluating the financial performance of any company’s share price. One is analyzing its historical stock performance or “technicals” for the purpose of identifying a predictable pattern; the other is taking a closer look at the fundamentals a.k.a financials of the company itself, which often times will help investors “look beyond the numbers” and exploit any perceived mismatch between intrinsic and market value.
Remember, finance is the science of uncertainty. These two approaches, although very helpful, are not perfect.
Technical analysis attempts to refute popular finance theory taught in universities around the world premised on stock unpredictability, where stock performance follows a random walk through time.
Technical analysis focuses on determining patterns a stock might take. People who invest by technical analysis takes in count volume of trades, Volatility of the markets, Bolinger Bands (determines if the stock is overbought or oversold), and many other technical factors before buying a stock.
The Fundamental Approach
The Fundamental Approach assesses the financial health of the company itself i.e., ratio analysis, but disregards market sentiment (Technical Analysis), yet we all know that stock prices are indeed market driven. Needless to say, the final valuation is more in line with accepted financial theory.
[pullquote]look beyond the numbers[/pullquote]
As you can see, the technicals and the fundamentals follow two completely different trains of thoughts in contemporary finance; some professional investors trade on a pure technical basis, while others only consider the fundamentals. A savvy investor should consider both. Analyze the financials to effectively “look beyond the numbers” and, if you like what you see, have a look at the chart to gauge the market sentiment.
[quote style=”1″]Also, it is essential to keep in mind that, when buying any stock, you are buying its future potential not its past performance. [/quote]