What is the best way to pick a stock to invest? What points and patterns we must observe before we decide whether we should buy, remain invested or sell a stock? Many investors, including the new and seasoned ones, tend to feel perplexed as to whether they should rely on the fundamental factors of the stock or focus more on the technical side. It remains a fact that despite myriad theories and methods of market and stock analysis, fundamental analysis and technical analysis are the two methods that most investors prefer to rely on.
What is fundamental analysis?
Fundamental analysis of security is a broad analysis that takes into account not only the stock's valuations, earnings, growth prospects, management, etc., but also the trends of the economy and the markets. So, it is a sum of all factors that can influence the assets' price. Fundamental analysis tries to assess a stock's intrinsic value as against its current market price. If the current market price of the stock or any type of security is less than the intrinsic value or true worth, one may choose to buy it and if the stock's market value is higher than its intrinsic value, investors can sell it.
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Click here to learn in 14 chapters what Fundamental Analysis is.
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What is technical analysis?
Technical analysis takes into account the historical returns and price action of security to predict the price movement of the stock in the market. An analyst tries to spot the support, resistance, breakout levels, moving averages and crossovers of a stock to predict how the stock will move going forward.
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Click here to learn what Derivatives and Technical Analysis is.
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The dichotomy
There are very few chances that fundamental and technicals of stocks go in different directions. One must understand that both are ways to anticipate how the stock will move but in events like broader market crash, like the current situation when the Russia-Ukraine war has triggered a massive selloff, many stocks do not respect their fundamental and technical analysis. For example, a stock may trade near its support level in the last trading session but fall in the very next session if there is a knee-jerk reaction in the market to an unprecedented event. History has shown that some of the top bluechip stocks with sound fundamentals and strong technical indicators have fallen in a broad-based selloff.
What should you rely on?
Both fundamental and technical analysis is useful and widely accepted. Seasoned investors and analysts use a combination of both to predict the growth prospects of a stock. The debate as to what is better is a misguided one and the clear answer is a combination of both. For long-term investors, fundamental aspects are more important but that does not mean he/she should neglect the technical aspects as a stock goes through different economic cycles and it tends to behave in a certain pattern in a particular timeframe. Traders, on the other hand, rely more on technical aspects since they invest for the short term. But, even a trader cannot neglect fundamentals completely. For example, the stock of an oil company may show some strength on the charts but it will surely be influenced by the movement of global crude oil prices.
