Question: What is the difference between technical and fundamental analysis?

Mel Malone

Answer:

Dear Mel,

Different Wall Street pros analyze stocks in different ways. The two most common methods, as your questions implies, are fundamental analysis and technical analysis. Both strive to determine if a stock should be bought or sold.

Fundamental analysis studies a company's financial situation, its management and its position within its industry. It looks at the key factors that influence a company's earnings, dividends and stock prices including: economic data (unemployment rate, interest rates, strength of the dollar, national debt and the like). It also takes into consideration the industry climate -- is it a cyclical industry? Is it a "hot" industry? Is it old fashioned and being replaced?

Those who subscribe to the fundamental theory tend to look for stocks with low prices vis-?-vis earnings or for stocks with rapid earnings growth.

Technical analysis involves charting statistics such as the stock's trading activity (price and volume) to determine if a stock should be bought or sold. These technical charts reveal trends, patterns and cyclical movements of individual stocks, industries or the market as a whole. They often look to see if a stock's price is continually hitting higher highs (or lower lows).

The most common type of chart used in technical analysis is the bar chart. A bar chart shows the price of a stock and its volume (the number of shares traded) over a given period of time, typically days, weeks or month. A daily bar chart, for instance, shows the highest, lowest and closing prices each day along with the number of shares traded each day.

Tip: You'll find one of the best description of technical analysis (and easiest to understand) in the paperback, Understanding Wall Street by Jeffrey B. Little and Lucien Rhodes.

Good luck!