Since we are in the midst of earnings season—which starts about two weeks after the end of each calendar quarter and is the time when most publicly traded companies release their performance figures and reports for use by investors and other stakeholders—it’s a good time to review the difference between fundamental analysis and technical analysis.
Fundamental analysis is a method of evaluating a company and determining the intrinsic value of its stock by analyzing the company’s financial statements and financial ratios, as well as assessing other factors like business, economic, and industry opportunities and risks. Essentially, the publicly traded companies are valued as though they were unlisted (i.e., with no regard for current market prices) and any buy/sell decisions are then made based on whether a stock is trading at a discount or a premium to its fundamental value. Business appraisers often use this type of analysis when estimating the value of privately held businesses.
Technical analysis does not consider the underlying business or the economics that affect the value of a company. Technical analysis is based only on stock price and volume data, which gives clues as to supply and demand dynamics—this is what ultimately determines the stock price. Technical analysts use chart patterns and trends, support and resistance levels, and price and volume behavior to identify trading opportunities.
While both methods are used for evaluating the stock and prediction of future stock prices, fundamental analysis is generally most useful for long-term investments, whereas technical analysis is more useful for short-term trading and market timing.