Generally speaking, security analysis falls into two broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. This includes analyzing a company’s financial statements and health, its management and competitive advantages, and its competitors and markets. By contrast, technical analysis ignores the “value” of a company or commodity and instead focuses exclusively on price and volume activity. In its purest form, technical analysis assumes that all the fundamental factors of a company are reflected in the price of its stock. Technical analysis studies the market supply and demand in an attempt to identify where prices will go in the future.
While most of our readers are more focused on fundamental analysis when making investment decisions, it is rare to find an investor who doesn’t at least consult a price chart before buying or selling a stock, mutual fund or commodity. Those who are more involved in technical analysis probably make use of technical indicators, which are mathematical manipulations of price and/or volume data to help identify momentum, changes in trend or overbought/oversold conditions. Taken to the “extreme,” technicians employ technical trading systems that generate buy and sell signals based on price or indicator values or movements.
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