Stock Analysis: Fundamental vs Technical

So, you've decided that one of your New Year’s Resolutions is going to be investing in stocks.  Learning about how to analyze and value stocks is a lesson that pays off tremendously over the course of an investing life. Of course you will have to do your homework first.

Stock analysis can be broken up into two camps: fundamental analysis and technical analysis.  While many people will get caught up in which is "better," first we need to understand what each one is.

Fundamental Analysis

Fundamental analysis looks at the overall health of company: analyzing information from their financial statements as well as anyplace else you can get information about the general well-being of the stock. You’ll be trying to determine whether it appears they have done well in the past and will continue to do well in the future. 

Fundamental analysis typically starts off by looking at the company's numbers. We've talked about where to find out a company's earnings, and there are many other financial ratios you can check out to get a general idea of how a company is doing.

You can also get involved in more subjective measures like evaluating the company's products and leadership. Many fund managers, for example, look at the track record of key corporate officials when deciding their outlook on a particular company. This can also include information about the company's strategy and positioning. All of these factors compose the fundamental picture.

Technical Analysis

Technical analysis has less to do with whether the company is "good" and more to do with what investor sentiment and trends are. Generally the key tool of technical analyses are charts and graphs. This kind of analysis focuses primarily on whether or not it's a good time to sell or buy a stock rather than whether the company is a quality company.

While debates will rage about which kind of analysis is "better," this is in many ways like asking whether a hammer is better than a screwdriver. Both are tools with given purposes and are more useful in certain situations. As the name suggests, however, it is probably a good idea to start by learning about fundamental analysis, since that will give a good overall framework with which to understand a company; but don't be afraid to learn about technical analysis as well.

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