How is Technical Analysis Different from Fundamental Analysis?

Technical analysis and fundamental analysis are two different strategies used by investors to help them choose good stocks to buy. While they can be used in conjunction with one another, most often they are not. Understanding the difference will help you determine which is better to use in your investment strategy. If you’re learning about investing for beginners because you’re just starting, it’s important to understand the differences.

Technical Analysis

What is Technical Analysis?

Technical analysis involves using past stock data, usually stock prices, on charts to estimate where the price may go in the future. Technical analysts look for patterns in the charts to spot trends. Based on what these trends have meant in the past, they can take an educated guess about whether or not the stock will go up in the immediate future. Technical analysis is deeply rooted in the past in order to make the best future prediction possible.

 Technical analysis is used by short-term investors, most often referred to as stock traders or day traders. Traders buy shares of stock and sell them almost immediately to capture short-term gains. Sometimes they sell the shares days later, but more often hours or minutes later. It depends on their overall strategy and what the trend is expected to do. Some trends can last a long time while others are quicker.

What is Fundamental Analysis?

Fundamental analysis doesn’t use charts. Instead, these analysts look at the fundamentals of the business such as quantitative factors including revenue, liabilities, and cash flow, and qualitative factors like management decisions, future products, and competitive advantage. Instead of looking at trends on charts, they try to determine the true value of the business. If the current stock price is lower than the business value, it’s a good buy.

Fundamental analysts are long-term investors. A long-term investment is one that is sold no sooner than six months. This is how most common investors invest for retirement portfolios and general wealth building. It can be done in less time and only takes research of a handful of corporations.

Differences

The first obvious difference is that technical analysis is used by traders and fundamental analysis is used by long-term investors. However, it is the details that make them truly unique from one another. Technical analysis requires skills for analyzing chart data and knowledge of trends. The individuals who use technical analysis are often referred to as chartists.

Chartists know a lot about how to follow trends. They aren’t new to the subject. Don’t try full time trading until you know what you’re doing and are confident in your skills. That still won’t guarantee your success. Many chartists use special technical analysis software to make finding trends easier.

Fundamental analysis requires knowledge of business finances and corporate management. While it takes time and studying to learn how to analyze the fundamentals of a company, this is easier for beginners. Beginners can learn how to invest money carefully in a business, not just a stock price. They can learn how to determine the value of a company based on its products and choices and not how it did yesterday or last year.

The method you choose depends on your investment goals. Do you want to trade stocks as a full time job or use long-term investing as a form of supplemental income? Whichever method you choose, read books and learn how to use the analysis approach effectively.

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