Securities & Trading Basics

Lesson 4: Fundamental vs. Technical Analysis

Before making investment decisions, traders and investors analyze securities using two primary methods: Fundamental Analysis (FA) and Technical Analysis (TA).

This lesson covers:

1. Fundamental Analysis (FA) – Evaluating the company's financial health
2. Technical Analysis (TA) – Using price charts and patterns
3. Key Differences & When to Use Each

1. Fundamental Analysis (FA) – Evaluating a Company’s Value

Fundamental analysis focuses on a company’s financial health, business performance, and market position to determine its intrinsic value.

Key Components of FA:

A. Financial Statements (Key Ratios)

Investors analyze three core financial statements:

1. Income Statement – Measures revenue, expenses, and profitability. Key Metric: Earnings per Share (EPS) – Net income per share.
2. Balance Sheet – Shows assets, liabilities, and shareholders’ equity. Key Metric: Debt-to-Equity Ratio (D/E) – Measures financial leverage.
3. Cash Flow Statement – Tracks cash inflows/outflows from operations. Key Metric: Free Cash Flow (FCF) – Cash available after capital expenditures.

1. Price-to-Earnings (P/E) Ratio – Stock price vs. earnings per share. Lower P/E suggests undervaluation.
2. Price-to-Book (P/B) Ratio – Compares stock price to the book value of assets.
3. Dividend Yield – Measures annual dividends relative to stock price.

1. Interest Rates & Inflation: Higher rates usually slow growth stocks.
2. Sector Strength: Some industries perform better in certain economic cycles.
3. Who Uses FA: Long-term investors, value investors (e.g., Warren Buffett).

2. Technical Analysis (TA) – Predicting Future Prices Using Charts

Technical analysis studies price patterns, trends, and trading volume to predict future price movements. It assumes all fundamental factors are already reflected in the stock’s price.

Key Components of TA:

• Uptrend (Bullish) – Higher highs & higher lows.
• Downtrend (Bearish) – Lower highs & lower lows.
• Support & Resistance Levels – Price points where a stock repeatedly stops rising or falling.

• Moving Averages (SMA & EMA): Smooth out price fluctuations.
• Relative Strength Index (RSI): Measures overbought (>70) or oversold (<30) conditions.
• MACD (Moving Average Convergence Divergence): Identifies momentum shifts.
• Volume Analysis: High trading volume confirms trends.

• Bullish Reversal Patterns: Hammer, Morning Star, Engulfing Pattern.
• Bearish Reversal Patterns: Shooting Star, Evening Star, Bearish Engulfing.
• Who Uses TA: Short-term traders, swing traders, day traders, and algorithmic traders.

3. Key Differences & When to Use Each

Fundamental Analysis

• Focus: Financial health & intrinsic value
• Used By: Long-term investors
• Data Used: Financial statements, economic data
• Goal: Find undervalued companies
• Time Horizon: Weeks, months, years

Technical Analysis

• Focus: Price movements & trends
• Used By: Short-term traders
• Data Used: Charts, price action, indicators
• Goal: Predict short-term price movement
• Time Horizon: Minutes, hours, days, weeks

Which One Should You Use?

• FA is best for long-term investing (buy & hold strategies).
• TA is ideal for traders looking for short-term price action.
• Professionals combine both: use FA to select stocks and TA to time trades.

Key Takeaways

Next Steps

Now that you understand how securities are analyzed, the next lesson will cover market participants (retail vs. institutional investors, hedge funds, etc.) and trading strategies.