Fundamental and technical equity research is two different stock-picking methodologies used for forecasting the future growth trends of stocks. Fundamental research concentrates on finding and evaluating the dynamics that influence stock prices, whereas technical analysis (also known as “charting”) focuses strictly on analyzing market behavior. Equity research analysts are often divided into two camps as to which process is best. Some advocate fundamental analysis, whereas others tout the benefits of technical. Fundamental equity research is the most common, but there are advantages to both.
Advantages of Fundamental Equity Research
Fundamental research is used to determine a security’s intrinsic value so one can determine whether to buy or sell the stock. By analyzing the underlying value of the stock and comparing it against others in the same category, researchers can determine whether the stock is under- or over-valued. The company’s balance sheet of earnings, expenses, assets and liabilities are also important factors. There is a variety of financial data used in the analysis, such as price-to-book (P/B) and price-to-earnings (P/E) ratio. Researchers also look at macroeconomic drivers and trends in the industry. Qualitative research is also included in their analysis. For example, the analyst seeks out new knowledge pertaining to the company that might impact the stock’s performance over time, such as changes to the board or product offerings. In addition, some researchers have personal experience with the stock’s product or service that they can incorporate into the decision-making process.
Advantages of Technical
Technical analysts look at market trends and seek to capitalize on them. They try to predict future prices based on historical price and volume data. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. For example, an analyst could look at the 200-day moving average. When the stock rises above the moving average line, it is a buy signal. If it falls below the moving average, it could be a sell signal. Another tool is the Relative Strength Index (RSI) which compares the magnitude of recent gains to recent losses to see if an asset is oversold or overbought. Day traders like technical analysis because they can act immediately upon the intra-day data. There is, however, skepticism to technical analysis as a form for stock-picking because of the subjective nature of the analysis — chart interpretation can vary significantly from person to person.
Which to Choose?
Some prominent research equity firms conduct both fundamental and technical analysis. It is argued that technical analysis provides insights which fundamental analysis can’t provide.