There is an old saying that a stock will fluctuate between “buying” and “selling” more often than it will change its underlying business. We think it applies to investing as well. When you buy a stock, you are actively buying a share of the company. But if you sell the stock, you are losing money because there is no ownership stake in the company.
When it comes to making investment decisions, both fundamental analysis and technical analysis play a central role. Each plays its part to help investors identify undervalued companies before they are taken over by speculators or beaten by price drops.
Here, Paul Zogala, who works as a Trader at Murchinson, will explain more in-depth what fundamental analysis and technical analysis are and how to employ them when making your investment decision.
What is fundamental analysis?
Paul Zogala explains that fundamental analysis is the process by which an investor looks at a company’s financial statements to identify possible strengths and weaknesses and make a judgement call on whether to buy or sell the stock. What’s important to remember about fundamental analysis is that it doesn’t consider recent price changes or the stock’s recent performance. Instead, it looks at a company’s fundamentals – the products it makes and how much it is selling relative to its total assets. You can put this analysis into one of two categories: valuation or profitability.
What is technical analysis?
As the experienced trader Paul Zogala explains further, technical analysis is the study of price patterns and how they relate to one another. It is used to forecast future price movements and understand how certain types of transactions can influence these. If you buy a stock at a certain price and then sell at a higher price a short time later, that is called a profit session Technical analysis is often used with the stock market in order to forecast future stock price movements. However, it can be used on other market types as well.
How to use fundamental and technical analysis
Investing requires a combination of technical analysis, fundamental analysis, and investment decision-making. Although technical analysis is often focused on the stock market, you can use it to make buying and selling decisions in the stock market as well. In fact, you can use the same techniques to make buying and selling decisions in the stock market as you would in the regular investing world.
The only difference is that technical analysis applies to stocks, while fundamentals apply to all investments.
If you are looking for ways to use technical analysis to your advantage, Paul Zogala suggests using options as well. With options, you can speculate on the price of a stock for a limited time before buying or selling it based on changing market conditions.
One way to use fundamentals and technical analysis together is to use them as a funnel. You can look at a company’s financial statements one year and then look at them the next year to see how the business is doing. You can also use them as a checkerboard to see how a company’s assets and liabilities break down by year.
Paul Zogala employs both fundamental and technical analysis to structure and monitors his portfolio holdings. In addition, this Chartered Market Technician and CFA Charterholder oversees the portfolio and performs the company’s strategy efficiently.
Both fundamental and technical analysis play an important role in making investing decisions. All this being said, you should use these tools together. At the end of the day, both fundamental and technical analysis are just tools. You can (and should) use them differently, depending on your investment goals and the type of investor you are.