For the vast majority of traders, the ideal approach to choosing investment targets involves both fundamental and technical analysis. While the former focuses on the nuts and bolts of a specific entity’s financial health, the latter looks more at numeric pricing and volume data that’s unrelated to a company’s long-term health.
Fundamental analysis (FA) has a few advantages that the tech wizards can’t claim. For starters, FA measures actual characteristics of a company, like its earnings per share, revenue growth, management changes, asset acquisition and more. The day to day cost of the firm’s shares and its trading volume are of no concern to the fundamentalists, who are more interested in the big picture of the corporation’s trajectory. Learning trading is an important step before entering the markets, which is why it is crucial to understand the key aspects of this non-technical way of evaluating a company’s investment potential. Here’s the least you should know about FA.
It Measures Real Things
When you look at a company’s annual report, balance sheet and financial statements to determine whether you want to purchase their shares, you’re doing true fundamentalist research. A technical strategy would forego all that data and focus only on share price and volume for some specific time range, like the past month. Reading financial reports reveals how the entity makes, spends and saves its money. A balance sheet, for example, is like a photographic snapshot of the organization’s health. This sort of information is based on reality, not price charts that might have been influenced by the general economy, rumors of war or a presidential election.
It’s Ideal for Long-Term Trading
For investors who want to buy and hold for time frames longer than one year, the fundamental methods are ideal. Short, and even long-range price charts don’t have any way of gauging the future. In fact, price and volume data are inherently historical pieces of information. If you plan to put a large amount of money into a company with a view toward growth, history is not the best diagnostician. However, a deep review of a corporation’s recent asset acquisitions, management hires, new product releases and retirement plans will tell a lot.
When you’re forced to truly study a company’s data, read its recent publications, review the background of top management personnel and put it under your personal microscope, you learn much about what makes an organization successful, or even unsuccessful for that matter. By researching just one or two entities, you gain an important mental capability that you can use in future analysis.
It’s Used by Major Traders
This method of sizing up stocks is important for long-term success. Some theorists consider this tactic an old school tactic because it relies much less on high level computer models than technical systems do, and because this more traditional way of reviewing a company’s shares is so widespread, there’s no shortage of sites on the topic for curious readers if you wish to find additional information as you get further into trading.