Financial Analysis

Investors are always looking for a better way to pick securities. Two types of data analysis have emerged to assist investors in making better investment decisions. In this section, we will introduce you to fundamental and technical analysis.


Fundamental analysis is a method used to evaluate the worth of a security by studying the financial data of the issuer. It scrutinizes the issuer's income and expenses, assets and liabilities, management, and position in its industry. In other words, it focuses on the "basics" of the business.

If you want to use fundamentals to help you make an investment decision, you would rely heavily on an offering prospectus, annual and quarterly reports as well as any current news items relating to the issuer whose securities you are considering.

Technical analysis is a method used to evaluate the worth of a security by studying market statistics. Unlike fundamental analysis, technical analysis disregards an issuer's financial statements. Instead, it relies upon market trends to ascertain investor sentiment to predict how a security will perform.

If you want to use technical analysis to help you make an investment decision, you will refer to financial charts, tables and ratios found in the financial press. You will look for market trends and averages to help you decide whether the "time is right" to make an investment

Which Type of Analysis Is Better for You?

Fundamentalists and technicians have been at odds with one another since the advent of investing. There is no clear answer as to which is right. Sometimes it appears that the technicians make better picks. Other times it seems the fundamentalists are making the right call. One thing is certain, when one group of analysts is wrong the other will surely emerge saying, "We told you so." So, which is right for you? There are many potential answers to that question. Three variants of popular answers are:

If you are a "long-term" investor looking for companies with solid foundation, growth and income potential, the fundamentals may sway you.

If you are a "short-term" investor (trader) looking for companies who are "on the verge" of being discovered, fundamentals will be useful to you.

If you are a "long-term" investor who is not as concerned about one company's basics because you will diversify to minimize risk, or you are a "short-term" investor waiting for investor sentiment to change, then technical analysis will be helpful to you.

Today, many investors find both fundamental and technical analysis helpful in painting a more complete and colorful picture on the investment canvas. Whether you use an asset allocation, buy and hold, or market timing strategy, you will find useful information from both the fundamentalists and technicians. The technicians can tell you about the broad market and its trends. The fundamentalists tell you whether an issue has the "basics" necessary to meet your investment objectives.

Courtesy - AmeriTrade