# Comprehensive Guide to Stock Analysis: Fundamental vs. Technical Methods

> **Definition**
>
> Stock analysis is the evaluation of a trading instrument, investment sector, or market to inform investment decisions and predict future price movements.

## What Is Stock Analysis?

Stock analysis is the evaluation of a particular trading instrument, an investment sector, or the market as a whole. Stock analysts attempt to determine the future activity of an instrument, sector, or market.

### Key Takeaways

*   Stock analysis is crucial for investors to make informed buying and selling decisions; it involves evaluating financial data, market trends, and industry information to assess the potential future value of stocks.  
    
*   Fundamental analysis focuses on a company's financial health by scrutinizing revenue, expenses, and key financial statements like balance sheets, income statements, and cash flow statements to gauge a stock's intrinsic value.  
    
*   Technical analysis involves the study of price movements, volume, and charts to predict future trends, identifying support and resistance levels to signal potential stock behavior.  
    
*   Other methods like sentiment and quantitative analysis offer alternative ways to assess stock value, relying on public perception and complex financial modeling, respectively.  
    
*   Despite their benefits, all stock analysis methods have limitations due to unpredictable market variables and potential for biased decision-making, underscoring the importance of a cautious and well-rounded approach.

![Stock Analysis: Using data and subjective opinion to evaluate publicly traded companies.](https://www.investopedia.com/thmb/f4FQ50xC9DWQUgxOYTn_j49sqyE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/stock-analysis.asp-final-253966e953d04fcc8f32e853b4db7892.png)

*— Investopedia / Julie Bang*

## Exploring the Basics of Stock Analysis

Stock analysis is a method for investors and traders to make buying and selling decisions. By studying and evaluating past and current data, investors and traders attempt to gain an edge in the markets by making informed decisions.

The notion of stock analysis relies on the assumption that available market information can be used to determine the intrinsic value of a stock. In the primary methods discussed below, investors use financial statements, stock price movement, market indicators, or industry trends to make investment decisions.

Much of this strategy relies on leveraging historical information. For instance, investors may analyze a company's stock based on it's financial performance. An analyst that is trying to determine the fair price of that stock may strive to understand how similar companies of similar performance performed in the past.

There are two basic types of stock analysis: [fundamental analysis](https://www.investopedia.com/terms/f/fundamentalanalysis.asp) and [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp). Each method is discussed more in-depth below.

## Breaking Down Fundamental Analysis

Fundamental analysis focuses on data like financial records, economic reports, company assets, and market share. To conduct fundamental analysis on a public company or sector, investors and analysts typically analyze the metrics on a company’s [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp) – [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp), [income statement](https://www.investopedia.com/terms/i/incomestatement.asp), [cash flow statement](https://www.investopedia.com/terms/c/cashflowstatement.asp), and [footnotes](https://www.investopedia.com/terms/f/footnote.asp).

These statements are released to the public in the form of a [10-Q](https://www.investopedia.com/terms/1/10q.asp) or [10-K report](https://www.investopedia.com/terms/1/10-k.asp) through the database system, [EDGAR](https://www.investopedia.com/terms/e/edgar.asp), which is administered by the U.S. [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC). Also, the earnings report released by a company during its quarterly earnings press release is analyzed by investors who look [to ascertain how much](https://www.investopedia.com/sec-filings-as-a-news-source-11775623) revenue, expenses, and profits a company made.

> **Tip**
>
> Companies usually release their financial statements at predictable intervals.

### Key Ratios in Fundamental Analysis

When running stock analysis on a company’s financial statements, an analyst will usually be checking for the measure of a company’s profitability, [liquidity](https://www.investopedia.com/terms/l/liquidity.asp), [solvency](https://www.investopedia.com/terms/s/solvency.asp), efficiency, growth trajectory, and [leverage](https://www.investopedia.com/terms/l/leverage.asp). Different ratios can be used to determine how healthy a company is.

For example, the [current ratio](https://www.investopedia.com/terms/c/currentratio.asp) and [quick ratio](https://www.investopedia.com/terms/q/quickratio.asp) are used to estimate whether a company will be able to pay its [short-term liabilities](https://www.investopedia.com/terms/s/shorttermdebt.asp) with its available [current assets](https://www.investopedia.com/terms/c/currentassets.asp). The formula for current ratio is calculated by dividing current assets by [current liabilities](https://www.investopedia.com/terms/c/currentliabilities.asp), figures that can be gotten from the balance sheet. Although, there is no such thing as an ideal current ratio, a ratio less than 1 could indicate to the stock analyst that the company is in poor financial health and may not be able to cover its short-term debt obligations when they come due.

Looking at the balance sheet still, a stock analyst may want to know the current debt levels taken on by a company. In this case, a stock analyst may use the [debt ratio](https://www.investopedia.com/terms/d/debtratio.asp), which is calculated by dividing [total liabilities](https://www.investopedia.com/terms/t/total-liabilities.asp) by total assets. A debt ratio above 1 typically means that a company has more debt than assets. In this case, if the company has a high [degree of leverage](https://www.investopedia.com/terms/d/dcl.asp), a stock analyst may conclude that a rise in interest rates may increase the company’s probability of going into default.

### Comparing Financial Statements in Fundamental Analysis

Stock analysis compares a company's current financial statements to previous years to assess growth, stability, or decline. A company's financial statement can be compared with others in the same industry.

A stock analyst may be looking to compare the [operating profit margin](https://www.investopedia.com/terms/o/operatingmargin.asp) of two competing companies, by looking at their income statements. The operating profit margin is a metric that shows how much revenue is left after [operating expenses](https://www.investopedia.com/terms/o/operating_expense.asp) have been paid and what portion of revenue is left to cover [non-operating costs](https://www.investopedia.com/terms/n/non-operating-expense.asp) and is calculated as operating income divided by revenue.

A company with an operating margin of 0.30 will be looked on more favorably than one with a margin of 0.03. A 0.30 operating margin means that for every dollar of revenue, a company has 30 cents left after operating costs have been covered. In other words, the company uses 70 cents out of every dollar in net sales to pay for its variable or operating costs.

## Unpacking Technical Analysis

The second method of stock analysis is technical analysis. Technical analysis focuses on the study of past and present price action to predict the probability of future price movements. Technical analysts focus on the entire financial market, emphasizing price, volume, and supply-and-demand factors.

Charts are a key tool for technical analysts as they show a graphical illustration of a stock’s [trend](https://www.investopedia.com/terms/t/trend.asp) within a stated time period. For example, using a chart, a technical analyst may mark certain areas as a [support](https://www.investopedia.com/terms/s/support.asp) or [resistance](https://www.investopedia.com/terms/r/resistance.asp) level. The support levels are marked by previous lows below the [current trading price](https://www.investopedia.com/terms/c/currentprice.asp), and the resistance markers are placed at previous highs above the current [market price](https://www.investopedia.com/terms/m/market-price.asp) of the stock. A break below the support level would indicate a [bearish trend](https://www.investopedia.com/terms/b/bearmarket.asp) to the stock analyst, while a break above the resistance level would take on a [bullish outlook](https://www.investopedia.com/terms/b/bullmarket.asp).

### Evaluating Stock Trends through Technical Analysis

Technical analysis works best when supply and demand affect the price trend. When outside factors are involved in a price movement, analyzing stocks using technical analysis may not be successful. Like other forms of analysis, analyzing stock price trends using technical analysis is more complicated as more variables are considered.

Examples of factors, other than supply and demand, that can affect a stock price include [stock splits](https://www.investopedia.com/terms/s/stocksplit.asp), mergers, [dividend announcements](https://www.investopedia.com/terms/a/announcment-effect.asp), a [class action](https://www.investopedia.com/terms/c/classaction.asp) lawsuit, death of a company’s CEO, a terrorist attack, [accounting scandals](https://www.investopedia.com/terms/f/financial-shenanigans.asp), change of management, [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp) changes, etc. These unpredictable events may occur that were essentially impossible to forecast or plan for.

> **Important**
>
> Technical analysis is only possible if a company's historical stock price can be used to predict future price movement.

## Alternative Stock Analysis Methods

Aside from fundamental analysis and technical analysis, analysts can leverage other less formal ways to analyze the price of a stock. With the interconnectivity and complexity of social media, analysts can perform sentiment analysis by engaging with [social media](https://www.investopedia.com/terms/s/social-media.asp) and news to gauge public perception of the company.

Quantitative analysis is similar to technical analysis in that it relies on complex financial calculations to determine future price projections. Quantitative analysis relies on mathematical and statistical modeling to review data; the goal of these models is to identify general trends based on what has happened in the past (not necessarily tied specifically to the stock price).

Analysts may also perform either a top-down analysis or bottom-up analysis. Top-down analysis requires an analysis of the overall economy, then narrows down to the specific performance of a company. On the other hand, bottom-up requires analyzing individual companies, then reviewing how the broader economy is performing. Both types of analysis are used to more generally understand factors that impact price such as broad market conditions.  

## Recognizing the Limits of Stock Analysis

Many investors use stock analysis for their investment strategies, but it can lead to misplaced confidence. Stock analysis often relies on limited information for several reasons. First, public companies may not fully disclose all situations of their company to the general public. Second, stock analysis strives to project the future (in which the information is simply not available).

Reliance on future events creates uncertainty in all stock analysis methods. The stock market can change quickly based on current conditions. For example, should political climates change rapidly and redefine [political risk](https://www.investopedia.com/terms/p/politicalrisk.asp), there may be an unpredictable impact to investments no previously foreseen.

As analysis dig into stock data, there is always an inherent risk of bias. If the data being analyzed is not anonymous, analysts may find themselves favoring certain outcomes based on what they know about the investment options. In addition, analysts and investors may be lured into confirmation bias that steers decisions to match a desired outcome.

Last, stock analysis is often complex. It isn't easy to pull together, and it requires a substantial amount of time. In addition, as variables change everyday, stock analysis requires continual thoughtfulness and analysis to evaluate morphing conditions.

## Which Stock Analysis Technique Is Best?

Investors may be best suited to use fundamental, technical, and quantitative analysis as one technique may not always be superior compared to other techniques. Based on the information available and objectives of the investors, it may be better to analyze the financial positioning, research the company's industry, or devise complex financial models.

## How Do You Know If a Stock's Price Will Go Up?

The best answer to this question is that nobody knows whether a stock's price will go up or down. However, analysts and investors can leverage information to make the best, most strategic decision to follow general information related to the stock. In general, if the fair value of a stock is less than the current price of the stock, the price will go down. On the other hand, companies with higher fair values as determined by the market will go up.

## How Can Beginners Start Analyzing Stocks?

Analyzing your first stock does not need to be difficult. First, gather as much public information related to the company as available. This includes recent news articles associated with the company as well as the most recent set of financial statements. Then, filter down this information to the most relevant information, Consider leveraging industry averages or data from competitors to set benchmarks. Then, decide whether the company is outperforming or underperforming compared to current prices and stock activity.

## How Do I Research Stocks Before Buying Them?

As an investor researching stocks, you should aim to collect a broad range of information about the company. This includes recent government filings, news articles, press releases, statements or activity on social media, and the company's financial statements. You can also leverage information from other analysts, as professionals may publicly give their opinion about the position of the company. This insight can be used to form your own opinion on future price movement.

## The Bottom Line

Both fundamental and technical analysis can be done independently or together. Some analysts use both methods of analysis, while others stick to one. Either way, using stock analysis to [vet stocks](https://www.investopedia.com/terms/v/vetting.asp), sectors, and the market is an important method of creating the best investment strategy for one’s portfolio.