- Fundamental analysis is also referred to as "value" analysis. This is because it attempts to analyze a stock based on drivers that directly affect the value of a stock. These drivers are known as the fundamentals of investing. This can be performed by looking at different ratios on the balance statement, income statement and cash flow statement. Valuation ratios such as the price to earnings ratio and the debt to equity ratio are used to compare stock shares in the same industry. Economic indicators such as the consumer price index (CPI) and the purchasing managers index (PMI) provide insight into the direction of the economy.
- Technical analysis looks at historical price and volume levels. The goal is to identify trends in the past to be able to predict price movements in the future. Technical analysis is not concerned with the value of the company as much as it is the direction of the stock. The main tool used to identify trends is a stock chart.
- Using both analysis techniques in conjunction with one another is the best way to choose which stock to buy. Fundamental analysis is used to choose which stock to buy by trying to determine the intrinsic value of the stock. In general, if the price of a stock is trading below the intrinsic value, it is a good investment. This is why different valuation ratios are useful in determining the relative value of stock over the competition. Once you decide which stock is the most "undervalued," decide on the best time to purchase by using technical charting. Look at the 52-week high, and compare it to the current price. Compare short-duration (10 or 15 day) moving averages with longer duration averages to identify entry and exit price points. Technical analysis is all about timing.
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