Fundamental Analysis or Technical Analysis? How to Pick the “Right” Investment
There is a long-lasting debate among investors about how to pick the “right” investment. Should they completely rely on fundamental analysis or technical analysis? Or do these methods of analysis really matter?
While there are many theories on how exactly to select a stock, the group of stock advisors who believe in fundamental analysis and the group of advisors who follow technical analysis will both argue that their method is the only method that works.
Sadly, with this debate comes great confusion and a significant amount of questions.
The solution: instead of just getting fixated on just one school of thought, either technical analysis or fundamental analysis, investors should use both to make decisions about their investments.
In the long term, the fundamentals of the company are what drive the stock prices higher or lower. In the short term, stock prices are dictated by the overall market sentiment, as well as other factors.
Investors can use fundamental analysis to assess the company’s financial position. There are many ways investors can do this, but some key fundamental measures they should look at, including the company’s revenues and profit growth rate over the years, are the company’s cash flows, its ability to bring new products to the market, and its market share.
In addition to all this, investors must also take into consideration the survivability of a business. For example, when it comes to penny stocks, investors need to look at if the business is sustainable. If the company is burning cash and not really making any progress, it might run into troubles ahead.
Similar to fundamental analysis, there are many ways to forecast a price change using technical analysis. Key factors investors need to look at include support and resistance (areas on the chart from where the price either rests or declines), volume, and the direction of the overall market.
For instance, if an investor finds a certain stock to be a strong contender after performing a fundamental analysis, but the overall market is looking a bit weak and there is no news expected about the company, then there is a probability that the stock will behave according to market conditions. Instead of buying, the investor can wait and might be able to get a better price later.
Combining both fundamental analysis and technical analysis, investors essentially increase their chances of profitability.
The fundamental analysis will tell investors the financial position of the company and its fair value, while the technical analysis can provide them with guidance about when to buy and where a potential selling point may be.
It is a well-known fact that markets fluctuate. Sometimes companies come under severe selling pressures, even if they have great fundamentals. Investors who are in the world of investing for the long term can become victims of irrationality in the stock market if they adhere to solely one type of analysis. Remember: the goal is to make money and grow your portfolio over time, and using both fundamental and technical analysis can help you to achieve that goal.