Analytics are a huge component of finding stock market success for active investors. Without dipping toes in the waters of researching and forecasting, a healthy dose of tried and true trading strategies can be reduced to gambling. Getting steeped in analytical data isn’t just a matter of opening the paper or a website and studying charts and numbers – there needs to be a method to an investor’s not-so-mad madness. Two of the prime methodologies used to narrow the gap between blind guessing, and educated selection is fundamental analysis and technical analysis. How do they differ?
Fundamental vs. Technical
Fundamental analytics are a method in which evaluating securities is done by attempting to measure a stock’s intrinsic value. This model takes all of a company’s tangible and intangible aspects into account to figure out the accurate value of stock before acting on a trade. Some of the factors that can be analyzed with this model include how the economy is moving, the conditions surrounding the company’s industry, and company-level data such as executive management. The biggest thing to note when it comes to this form of analysis is that the number derived from measuring intrinsic value is not necessarily going to jibe with the number currently being portrayed in the market.
Technical analysis, on the other hand, is the evaluation of securities by studying existing market activity through such tangible metrics as past volume and prices. There is no attempt to analyze intrinsic value to derive ideas on market performance. Rather, this methodology sticks to the power of charts to pinpoint trends and patterns that could dictate future performance.
This gap in analytical approach is one that’s extremely broad, primarily because certain elements that are crucial to properly execute one form of analysis is essentially worthless in the other camp. For instance, fundamental analytics thrive on mining data from earnings, assets, liabilities, and expenses from a company. These same metrics are nothing but white noise to an investor using technical analysis. On the other hand, charts and patterns will paint an incomplete picture of market performance for the fundamental analyst, because it’s not digging deep enough into a company’s minutiae to derive indicators of future stock performance.
Why the Difference?
The primary difference between fundamental analysis and technical analysis stems from philosophies built on the company’s stock price. Technical analysts believe all of the information needed about a company, including info indicating future performance, can be found in the stock price. A thorough study of a company’s charts contains enough applicable data to minimize the guessing game to the point where deeply educated predictions can be made.
Fundamental analysts, meanwhile, look at a company’s stock price with a wary eye. To them, the number could be a front of sorts, masking gaps in a company’s performance that don’t bubble up to the surface all that readily. In their eyes, digging into things like financial statements, assets vs. liabilities, and what a CEO may be doing provides investors information about a company’s potential feature that a chart may skip over.
How the Analyses are Used
As one may guess, there are certain scenarios in which using fundamental analysis is the preferred method of analytical style over technical analysis and vice versa. Technical analysis tends to be used in short-term stock strategies, where the long-term future of a company isn’t nearly as crucial to deducing profitability as what the company stock may do over the course of several hours. Fundamental analysis is an ideal strategy to deploy for those that are in the market for the “long haul,” where money is made down the road as opposed to right around the corner.
These differences are further crystallized by specific stock-centric terminology. Technical analysis is typically deployed when an investor is looking for a trade, and fundamental analysis is going to be routinely used when an investor is seeking investment.
Is One System Better than the Other?
Because technical analysis and fundamental analysis tend to be used in markedly different scenarios, saying one is better or more correct than the other is kind of like trying to compare apples and oranges. With that being said, this doesn’t necessarily mean that they’re looked at in the same light.
Specifically, some critics view technical analysis as a junky system used only by those that see the stock market as a get rich quick scheme. These naysayers tend to see those that deploy technical analysis are know-nothing dupes that lack the discipline required to play the market properly. However, those interested in technical analysis can take comfort in knowing that nearly every brokerage out there does not treat those that use this tactic as the red-headed stepchildren of Wall Street.
Even though the two analytical camps are on the opposite ends of the spectrum, both in practice and in reputation in some circles, the savvy investor may be able to deploy both tactics at once. For instance, proponents of fundamental analytics could use technical analysis techniques to determine precisely when the best time would be to jump into an undervalued stock. The blending of the two strategies tends to highlight a fundamental truth in finding stock market success: timing is everything.
It’s Entirely Up to You
There is no right or wrong analytical method for an investor to use. Whichever one is deployed substantially depends on your stock philosophies, which are determined by metrics like goals related to time and money.
However, this decision is not to be made lightly. It’s imperative that investors do their homework and eliminate any shade of doubt that may be in the landscape. Making the wrong decision – or even a decision that doesn’t jibe 100% with your core philosophies – is a good way to travel down a path of unhappiness, frustration, and even loss. Remember, there is money at stake when it comes to decisions built around analytical philosophy. Investors would be wise to make this truth their mantra as they determine their strategy, as it may help them to retain the discipline needed to make smart decisions.