Every investor has their own way of picking stocks. Some like to choose stocks based on the ticker, some on the name of the company. The majority, however, use either Technical or Fundamental analysis. There have been success stories from both camps, but before you decide which strategy you want to use, let’s establish what the two methods of analysis are and how you use them.

Technical Analysis:

Technical analysis is the method of stock analysis by which the investor uses the stock’s chart along with other indicators to pick which stocks to invest in. Many investors that use technical analysis, including myself, believe that the stock price reflects all information available about the stock and therefore is never under- or over-priced. Also, technical analysts examine the price movement of a stock to determine the supply and demand levels moving the market.

By reading these basic market concepts, the investor can make an educated bet on the future direction of the stock. You aren’t trying to guess what price the stock will go to, but rather how likely it is that the stock will continue in its current trend or change directions into a new trend.

I consider this method both an art and skill. It takes years of experience to correctly read a chart, but learning is not difficult for a visual learner.

Fundamental Analysis:

Fundamental analysis is the method of picking stocks by analyzing a company’s financial data and determining if the stock is over- or under-priced. This strategy is usually a long-term one as investors hold stocks for several years, waiting for the market to adjust the stock to what the investor believes is the “correct” price. Many famous investors, including Warren Buffet, Peter Lynch, and Benjamin Graham, have made fortunes investing this way.

Usually, a fundamental analyst believes that the market is perfect and completely efficient. They believe that if they dig deep enough in company data, they can use earnings growth, balance sheet items, and analysis of the business environment to value the stock and the market will eventually realize the company’s “true value.”

This method of investing is what they teach you in college and could be considered the “traditional” way to invest.

So, Which Should I Use?

This question can be answered largely based on your personality. For example, I am a very visual person. If you try and explain something to me verbally, it is not as affective as if you draw me a chart of some kind. Also, My beliefs about the marketplace and the plain fact that technical analysis makes sense to me prove how much of a fit it is with my trading style.

You might not feel the same way. That’s okay! Neither is a wrong method, but one will definitely be better for you than the other. I will do some more work to write up more on these methods of investing in the near future.