While there are many techniques that you can use to study an investment and determine what the best course of action for you might be.
At the most basic level, you can decide to use fundamental analysis or technical analysis as you consider your investments.
This type of analysis is often considered “big picture.” Rather than look at the numbers related to its performance, you look at other factors that have to do with the underlying health of the investment.
These fundamentals might include the political situation in the Middle East if you are looking at oil. For a new technology stock, the fundamentals might include the competence of management personnel in the company, or the company’s growing (or receding) market share.
Fundamental analysis can help you consider how different factors might affect the performance of an investment. Consider what factors are most likely to affect the investment on a more “global” scale.
Understanding these factors can help you decide when it is time to sell an investment, or help you decide to wait it out. If there is a general market drop, but the fundamentals of the investment remain the same, chances are that the investment is likely to recover if the market does.
Rather look at these more general factors, technical analysis usually focuses on the actual performance of the investment. It’s about looking at the patterns in the performance, following price action.
Instead of looking at changes in management, or weather conditions that might affect supply, technical analysis deals with what the price is doing. There are a number of patterns that can be found in the price movements of an investment.
Proponents of technical analysis techniques use trends to see when it is time sell. Sometimes knowing when to sell is as important as knowing when to buy.
What Analysis Should You Use with Your Investments?
In many cases, those who are interested in long term investing, including those with goals of preparing for retirement, favor fundamental analysis. Rather than focusing entirely on the numbers, many long-term investors want to see the big picture, and make decisions based on underlying factors, rather than current performance, which could be the result of market volatility.
Short-term investors can also use fundamental analysis to get an idea of what could happen as a result of different “big picture” events.
Short-term investors, especially day traders, often make use of technical analysis. Using technical analysis provides many traders the chance to see what is happening right now, as well as what has been happening in the weeks and months previous to the day being considered.
Technical analysis can also be used over longer periods of times, considering price trends over years or even decades, making it of interest to long-term investors as well.
However, many investors benefit from the insights offered by both fundamental analysis and technical analysis. You can get a better idea of what is happening with an investment when you look the fundamentals, as well as when you consider the more immediate price trends with an investment.
Photo by Argonne National Laboratory
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