Investor basics: Fundamental Analysis vs. Technical Analysis

If you were to be listening to news or radio channels everyday which talks about investments, the term Fundamentals is frequently used by the financially incline people to evaluate stocks. You will hear something like "This stock has very good fundamentals, it's a good stock to go for" or "Looking at company XYZ strong fundamentals ...". So what does the term Fundmentals really mean in that context?

I have learned from http://www.investopedia.com/ that there are basically 2 genres of investing approach: Fundamental Analysis & Technical Analysis. By definition, Fundamental Analysis means looking at any data, besides the trading patterns of the stock itself, that can be expected to impact the price or perceived value of a stock. As the name implies, it means getting down to basics. And on the other hand, Technical Analysis means focussing only on the trading and price history of a stock, in essence the behaviour of the price fluctuations.

Confused?

Allow me to give you a simple day-to-day example:
Take for example a stock of a company which sells shoes for ladies. The fundamental analysis approach will be to study the company's annual performance. You will start by taking out the annual reports, studying its profits/loss, the assets and liabilities, how the management has been fairing and its strategies in managing its business. In short, you are evaluating its intrinsic value. The question you are really answering in this approach is "Is this stock of this company worth it based on its track performance and future?"

On the other hand, the Techinical Analysis for this approach will be to study the behaviour of the price fluctuations such as monitoring the price movement of the stock itself. You will be looking at its market activity which makes up of prices and volumes in general. Coming back to our example, a technical analysis will be to observe these questions "At which peak period do these ladies buy shoes?" , "When will the price of the shoes increase?" and "When is it most likely that they will have a sale to boost the sales which will in turn contribute to the stock price increase?" This approach has nothing to do with studying its reports, balance sheets, assets and liabilities, management skills or such. It's purely on the behaviour and price patterns.

In summary, Fundamental analysis approach is on the value of the stock in terms of its business structure, and Technical analysis approach is on the psychology of the stock itself which has no relation with the company's business structure.

One of THE greatest fundamental analyst is Warren Buffet, 2nd richest man in the world. I will write about him in my next post ;-)