How to Analyze Stocks: Fundamental vs. Technical Analysis Explained

When you consider investing in the stock market, stock analysis is really a core need. The two main types of stock analysis are fundamental and technical analysis. Both these methods enable investors to know which stock to buy or sell; however, they are examining somewhat different aspects of the stock. Let us break them down in simple terms.

What is fundamental analysis?

Fundamental analysis refers to evaluating the respective stock fundamentals. It means analyzing the strength of the company behind the stock. According to investors, using this method creates a strong basis for determining different equity investment opportunities, such as a company's earnings, debts, growth potential, and attractiveness of the industry.

Here are some key elements of fundamental analysis:

To describe the operation of the financial statements, the income statement (profit and loss) shows how much profit has been generated, how much should be paid out, and what the asset ownership status is, while the balance sheet indicates how assets are valued against liabilities.

These are records that state how much is earned, owed, and owned by an establishment—an income statement (profit and loss) and a balance sheet (assets and liabilities).

Earnings per share (EPS): It tells how much money the company earns as profit based on each share of stock. Higher EPS sometimes describes better performance.

Price-to-earnings ratio (P/E ratio): This compares the price of the stock relative to the number of earnings that the company makes. Generally, a lower P/E means the stock is cheap against its earnings and not entirely dependent on that.

Potential for Growth: Investors also want to see visible growth in the future of a company based on new products, new markets to enter, or new efficiencies in operations.

Using financial analysis, one attempts to ascertain whether a particular stock is undervalued or overvalued. If a stock is undervalued, it would probably be a good time for an investor to buy; while, if it were overvalued, that would prompt an investor in the opposite line of action—to sell.

What is technical analysis?

Technical analysts explore the market based on developments in historic stock prices rather than on the fundamentals of the underlying company. This method charted past price patterns to predict future behavior. Whereas setting trading signals  is a major concern when applying technical analysis. These signals are indicators/patterns/trends based on which buy or sell decisions on a stock can be made.

Some important tools used in technical analysis include:

Charts: They show how the stock price has moved over the past time and how the technical analyst predicts its future movement by looking at the sequences.

Moving averages: An average over a range of time, for example, fifty days, one hundred, or two hundred. It is used to smooth the ups and downs in prices on a daily basis and to give the general direction.

Support and resistance levels: Price points at which the stock has a tendency to stop going down (support) or stop going up (resistance). Traders follow those levels for actions they want to take.

Volume: Number of shares traded. This usually implies that there is an interest in the stock at high volume, which most often implies the happening of something important.

Technical analysis doesn’t focus on the company’s health or growth but instead looks at how the market has reacted to the stock in the past.

Fundamental vs. Technical Analysis: Which One Should You Use?

Both stock analysis strategies can help you make better decisions. It depends on your investing style:

Fundamental analysis is better for long-term investors who want to find strong companies that will perform well over time.

Technical analysis is more useful for short-term traders who want to make quick decisions based on stock price movements.

Indeed, many investors see the stocks under consideration in both ways to get a more comprehensive picture. They consider both fundamental characteristics and technical signals, which help them with investment decisions.

Understanding the two methods of stock analysis will help you choose a method suitable for your investing goals. If it is long-term growth or short-term profits, stock analysis is key to great investment decisions.