Fundamental and Technical Analysis
At Sharkey, Howes & Javer our investment department uses a wide range of tools when constructing and rebalancing client portfolios. With so much data and analytic tools available today, it is easy to be overwhelmed and overthink things as an investor. That is why our investment department uses a balanced approach when making investment decisions. In this article, we will define a few basic tools which help our firm make thoughtful decisions when investing.
Fundamental vs Technical Analysis
These are the two perspectives investors choose to consider when evaluating an investment decision. Fundamental analysis consists of looking at the value of a given company and determining if it’s overvalued, undervalued, or a fair price. The fundamental lens looks at the financial well-being of a company by examining items such as assets, liabilities, expenses, earnings, and management of the company. Technical analysis assumes most of the fundamental metrics are already accounted for in the stock’s current price. Therefore, the technical lens will try to identify trends or patterns to predict what the stock will do next.
Fundamental Analysis – Price to Earnings
One of the most popular fundamental analysis metrics is the price to earnings ratio. This is simply evaluating the price of a company’s stock compared to the earnings. This can be a useful measure in determining which company is a better buy in the same industry. Inherently, investors cannot rely on past earnings to predict the future and earnings guidance given by the company can be over or understated due to multiple unknown variables. That is why we look at many fundamental metrics. The takeaway is P/E ratios are used to help investors determine if a company is overvalued or undervalued when comparing the stock price to the company’s earnings and then comparing that ratio to other similar companies. In some cases, a high P/E may suggest an overvalued company and a low P/E may suggest an undervalued company.
Technical Analysis – Moving Averages
Moving averages is one of the most common technical analysis tools. Moving averages takes the historical average of the price for a given period of time. For example, a 200-day moving average will average the last 200 days of the stock’s price and create a trend line. When the price of a stock falls below the 200-day moving average, it can be interpreted as a bearish or negative sign. If the stock’s price is below the 200-day moving average and breaks through above it, this can be a bullish or positive sign for the stock price. Moving averages can help determine when a trend may be breaking or a new trend is forming. The most common timeframes are the 20 day, 50 day, and 200 day moving averages.
Fundamental and technical analysis are often used together to help formulate an opinion and make a final decision when investing. There are numerous metrics when evaluating stocks and aiming to forecast the markets. At Sharkey, Howes & Javer our investment department uses a multitude of both fundamental and technical analysis to make investment decisions for clients. If you have questions about investing or want a free consultation with one of our CERTIFIED FINANCIAL PLANNERS, do not hesitate to reach out.