The most common methods that investors use to analyze the benefits and risks associated with long-term investments in the stock market include fundamental analysis, technical analysis, and quantitative analysis. Long-term investors look for investments that offer a greater probability of maximizing their returns over a longer period of time. Generally, this means at least one year, although many financial experts suggest time frames of five to ten years or longer. One of the benefits of being a long-term investor is the ability to save and invest for big goals that require significant time to achieve the highest rewards, such as retirement.
By understanding the differences between fundamental, technical, and quantitative analysis, long-term investors give themselves access to three valuable stock-picking strategies they can use for making profitable investment decisions.
- The goal of fundamental analysis is to come up with a fair value of a company by evaluating all aspects of the business, along with the industry, the market as a whole, and the domestic and global environment.
- The goal of technical analysis is to evaluate data—such as historical returns and price changes—to chart patterns that can be used to estimate future price movement for securities and the market as a whole.
- Quantitative analysis focuses on using simple financial ratio calculations to gain insight into the valuation of a specific company or broad market.
- Investors and analysts will frequently use a combination of fundamental, technical, and quantitative analysis when evaluating a company’s potential for growth and profitability.
The majority of investors who want to evaluate long-term investment decisions start with a fundamental analysis of a company, an individual stock, or the market as a whole. Fundamental analysis is the process of measuring a security's intrinsic value by evaluating all aspects of a business or market. Tangible assets including land, equipment, or buildings that a company owns are reviewed in combination with intangible assets such as trademarks, patents, branding, or intellectual property.
To perform a fundamental analysis, you'll want to review a company's financial statements, historical data, investor conference calls, press releases, analyst reports, and analyst estimates.
When evaluating the broader scope of the stock market, investors use fundamental analysis to review economic factors, including the overall strength of the economy and specific industry sector conditions.
Fundamental analysis results in a value assigned to the security in review that is compared to the security's current price. Investors use the comparison to determine whether a long-term investment is worth buying because it is undervalued or if it is worth selling because it is overvalued.
The process of evaluating securities through statistics is known as technical analysis. Analysts and investors use data on market activity such as historical returns, stock prices, and volume of trades to chart patterns in securities movement. While fundamental analysis attempts to show the intrinsic value of a security or specific market, technical data is meant to provide insight on the future activity of securities or the market as a whole. Investors and analysts who use technical analysis feel strongly that future performance can be determined by reviewing patterns based on past performance data.
Technical analysis uses data from short periods of time to develop the patterns used to predict securities or market movement, while fundamental analysis relies on information that spans years. Because of the short duration of data collection in technical analysis, investors tend to use this method more in short-term trading. However, technical analysis can be a beneficial tool to evaluate long-term investments when combined with fundamental analysis.
Evaluation of the historical performance of a company or broad market is often done through quantitative analysis. Investors perform quantitative analysis through simple financial ratio calculations such as earnings per share (EPS) or more complex calculations such as the discounted cash flow (DCF).
The results of quantitative analysis provide insight into the valuation or historic performance of a specific security or market. But quantitative analysis is not often used as a standalone method for evaluating long-term investments. Instead, quantitative analysis is used in conjunction with fundamental and technical analysis to determine the potential advantages and risks of investment decisions.
The Bottom Line
Fundamental analysis is most often used when determining the quality of long-term investments in a wide array of securities and markets, while technical analysis is used more in the review of short-term investment decisions such as the active trading of stocks. Investors use quantitative analysis to evaluate the financial stability of a company.
While some investors prefer the use of a single analysis method to evaluate long-term investments, a combination of fundamental, technical, and quantitative analysis is the most beneficial.