Portfolio Management - Technical vs. Fundamental Analysis
There are two schools of thought about how a stock will behave relative to the market, and like any investment strategy or philosophy, both have their advocates and adversaries.
- Technical analysis, which involves detecting patterns in security prices, goes on the assumption that the price of a stock - like the price of everything else - is a matter of supply and demand. Technical analysts, or technicians, generate and interpret charts of the price and volume histories of stocks to predict movement in stock prices according to perceived trends.
- Fundamental analysis, which examines the earning potential of the company issuing a stock, goes on the assumption that a share of ownership of a company has an intrinsic value that is a function of the underlying value of the company as a whole. Fundamental analysts report which shares are undervalued by the investor community and which are overvalued, then trust the market to make corrections.
In the world of stock analysis, fundamental and technical analysis are on completely opposite sides of the spectrum. Earnings, expenses, assets and liabilities are all important characteristics to fundamental analysts, whereas technical analysts could not care less about these numbers. Which strategy works best is always debated, and many volumes of textbooks have been written on both of these methods. We'll discuss each in turn.