If you’re interested in keeping track of the stock market, you’ll want to be aware of the two main types of stock market analysis: fundamental analysis and technical analysis.
To put it very briefly, fundamental analysis is when you study all of the different things that could affect the stock price of a company. These things may include financial statements, new stories, and how the industry is faring. A fundamental analysis is based on the actual value of the company, and tells you if the stock is currently priced above or below value. It’s sort of like evidence presented in a trial based on circumstantial evidence as opposed to scientific facts.
Technical analysis uses only price and volume of stocks to predict how the company will do in the future.
Since the prices of a company’s shares are changing every minute, if you’re interest in being an investor, it’s imperative that you try to forecast what may happen. By accurately guessing how a company will do in the future, it will help you make smarter investments.
What is a fundamental analysis?
As mentioned briefly above, fundamental analysis is an analysis based on the exterior factors that many influence an economy, and the success of a company. This sort of analysis will reflect that actual value of a company and its shares. It does so by looking at all of the things that may influence the company’s value, such as competition in the market, how the industry is doing, financial statements, business relevancy, and coverage in the media. Fundamental analysis is helpful when:
- Determining the actual stock value of a company
- Making long term investments
It is conducted by:
- Using past and present data
- Looking at economic reports, industry stats, media
What is a technical analysis?
A technical analysis is used to predict what the value of a company’s shares will be in the future. This sort of analysis uses performance statistics to provide a comprehensive insight into the value changes of the company. A technical analysis is helpful when:
- Determining the future price of stocks
- Making short term investments (day trading)
It is conducted by:
- Using only past data
- Looking at chart analysis
The four most common ways to perform a technical analysis are with simple moving averages, support and resistance, momentum-based indicators and trend lines. We’ll go over these below.
Simple moving averages
Simple moving averages is perhaps the most common way to perform a technical analysis. These are indicators that can help predict what a stock will do by looking at its average daily price over a fixed period of time.
Support and resistance
By using the price history of stocks, you can see when buyers have helped out in the past, and where sellers have hindered in the past.
Momentum-based indicators use formulas to provide signals about when to buy and sell.
Trend lines are projections made by looking at how stocks have been traded in the past. They are useful for analyzing stocks when there isn’t a price history to look at.