Investing 101: What is Fundamental and Technical Analysis?

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Number one rule of investing: KNOW what you’re investing in. It’s not a good idea to risk your hard earned cash by putting it in an unknown company stock or some other investment. Even farmers study the soil, seasons, and weather before they start planting you know. You have to check first if an asset or investment is secure instead of just believing what random people say. They might be more clueless than you are after all.

Similar to how there are as many strategies and tactics in sports as there are coaches and pros, there are also many strategies in choosing company stocks and other investments. Most of those strategies, however, can be broadly classified into two kinds, and that is fundamental and technical analysis.

(Disclaimer: There are so many investing methods and strategies that it would take too long to explain them all here. For this article, we’ll simply discuss fundamental vs technical analysis.)

Investing 101: Fundamental and Technical analysis

Fundamental Analysis

The first “style” of looking at certain investments is fundamental analysis.

When you look at things like how well a company works, how well their products fare in the market, how good are the company’s sales and profits, their dividend growth, P/E ratio and other stock indicators, how good is their current leadership and members of their management, how future trends and technology can affect their company, and more, that’s generally what people call fundamental analysis.

In this method, you’re looking for the intrinsic value of a stock or asset and you are trying to answer the question: “is this a good investment or not?”

If you want to invest for the long term, you might want to focus more on learning fundamental analysis. Unlike traders, you’re not trying to profit from short-term price changes. You’re looking for great investments that grow in value despite the market’s ups and downs.

 

In the short run, the market is a voting machine but in the long run, it is a weighing machine.

— Benjamin Graham

 

Technical Analysis

Aside from fundamental analysis where you study how valuable a company or some other investment is, technical analysis is about studying the movements and patterns of an investment or asset’s price to try to predict how it will move in the future.

Technical analysis is used most often by traders who buy and sell stocks and other investments to make money off the price changes in the short term, usually in just a few days or weeks, or even price changes within the day.

If you predict that an investment’s value will increase in the short term you can do a “long” trade where you buy it now and sell it later when the price does increase. On the other hand, if you predict that an investment’s value will decrease, you do a “short sell” (read our guide here) instead which is like a “borrow shares from your broker to sell at the higher price now, buy at lower price and return what you borrowed later” transaction with your broker.

Learn and Use BOTH!

Now that you know the difference between technical and fundamental analysis, you might be tempted to think that you can only use one or the other. Don’t.

You can actually use both methods, and they complement each other well.

For example, if you want to invest for the long term, you can use fundamental analysis to check the value of a company stock or investment that you plan to invest in. While you’ll be able to tell if an investment is good or not, if you want to know a good time to buy (or sell) an investment you will need to use technical analysis techniques.

Why? For one thing, you’ll be able to check if the asset is overpriced right now and it might be better to wait until a correction where the price decreases to a more reasonable value. You’ll also be able to check if there are downtrends where you’ll be able to buy an asset at a discount later.

The reverse is also true if you want to do some trading. You can somewhat predict downtrends or uptrends in the price movements of investments, but to increase your chances of success you will still need to do your fundamental analysis. For example, a downtrend in a company with good fundamentals might be temporary so you might not want to risk short selling there. On the other hand, shorting a company whose stock price is on a downtrend might be a good idea especially if your fundamental analysis research shows that the company is actually experiencing some serious problems.

 

If you’re still a beginner at personal finance and investing, it’s recommended that you study a few different strategies until you find one you like. For example, in my case, I used a lot of technical analysis when I traded Forex (currencies). Since I didn’t like the lifestyle of a trader, however, I use fundamental analysis more and use a little technical analysis techniques before I actually buy an investment.

In any case, we’ll end the lesson here for now. If you want to earn money through investing or trading stocks, bonds, mutual funds, and other assets, you’ll need to learn some good techniques and strategies from the professionals.

If you can’t have an expert teach you in person, you can simply read the guides that they’ve written for us instead! Check out these books below to learn more!