The most common methods that investors use to analyze the benefits and risks associated with long-term investments in the stock market include fundamental analysis, technical analysis, and quantitative analysis. Long-term investors look for investments that offer a greater probability of maximizing their returns over a longer period of time.
Generally, this means at least one year, although many financial experts suggest time frames of five to ten years or longer. One of the benefits of being a long-term investor is the ability to save and invest for big goals that require significant time to achieve the highest rewards, such as retirement.
By understanding the differences between fundamental, technical, and quantitative analysis, long-term investors give themselves access to three valuable stock-picking strategies they can use for making profitable investment decisions.
Key Takeaways
- The goal of fundamental analysis is to come up with a fair value of a company by evaluating all aspects of the business, along with the industry, the market as a whole, and the domestic and global environment.
- The goal of technical analysis is to evaluate data—such as historical returns and price changes—to chart patterns that can be used to estimate future price movement for securities and the market as a whole.
- Quantitative analysis focuses on using simple financial ratio calculations to gain insight into the valuation of a specific company or broad market.
- Investors and analysts will frequently use a combination of fundamental, technical, and quantitative analysis when evaluating a company’s potential for growth and profitability.
Fundamental Analysis
The majority of investors who want to evaluate long-term investment decisions start with a fundamental analysis of a company, an individual stock, or the market as a whole. Fundamental analysis is the process of measuring a security's intrinsic value by evaluating all aspects of a business or market. Tangible assets, including the land, equipment, or buildings that a company owns, are reviewed in combination with intangible assets such as trademarks, patents, branding, or intellectual property.
To perform fundamental analysis, you'll want to review a company's financial statements, historical data, investor conference calls, press releases, analyst reports, and analyst estimates.
When evaluating the broader scope of the stock market, investors use fundamental analysis to review economic factors, including the overall strength of the economy and specific industry sector conditions.
Fundamental analysis results in a value assigned to the security in review that is compared to the security's current price. Investors use the comparison to determine whether a long-term investment is worth buying because it is undervalued or if it is worth selling because it is overvalued.
Technical Analysis
The process of evaluating securities through statistics is known as technical analysis. Analysts and investors use data on market activity such as historical returns, stock prices, and volume of trades to chart patterns in securities movement. While fundamental analysis attempts to show the intrinsic value of a security or specific market, technical data is meant to provide insight into the future activity of securities or the market as a whole. Investors and analysts who use technical analysis feel strongly that future performance can be determined by reviewing patterns based on past performance data.
Technical analysis uses data from short periods of time to develop the patterns used to predict securities or market movement, while fundamental analysis relies on information that spans years. Because of the short duration of data collection in technical analysis, investors tend to use this method more in short-term trading. However, technical analysis can be a beneficial tool to evaluate long-term investments when combined with fundamental analysis.
Quantitative Analysis
Evaluation of the historical performance of a company or broad market is often done through quantitative analysis. Investors perform quantitative analysis through simple financial ratio calculations such as earnings per share (EPS) or more complex calculations such as the discounted cash flow (DCF).
The results of quantitative analysis provide insight into the valuation or historic performance of a specific security or market. But quantitative analysisis not often used as a standalone method for evaluating long-term investments. Instead, quantitative analysis is used in conjunction with fundamental and technical analysis to determine the potential advantages and risks of investment decisions.
The Bottom Line
Fundamental analysis is most often used when determining the quality of long-term investments in a wide array of securities and markets, while technical analysis is used more in the review of short-term investment decisions such as the active trading of stocks. Investors use quantitative analysis to evaluate the financial stability of a company.
While some investors prefer the use of a single analysis method to evaluate long-term investments, a combination of fundamental, technical, and quantitative analysis is the most beneficial.
FAQs
The majority of investors who want to evaluate long-term investment decisions start with a fundamental analysis of a company, an individual stock, or the market as a whole. Fundamental analysis is the process of measuring a security's intrinsic value by evaluating all aspects of a business or market.
Which is better fundamental analysis or technical analysis? ›
In-depth understanding: Fundamental analysis provides a comprehensive understanding of a company's financial health, including its income statement, balance sheet, and cash flows. Timely: Technical analysis allows for real-time decisions based on the price and volume data.
Is quantitative analysis better than technical analysis? ›
Technical and Quantitative Analysis
Technical analysis is typically more user-friendly than quantitative analysis. It can come down to studying a price chart and simply establishing if the price action is bullish or bearish. However, this can allow a degree of subjectivity to creep into trading decisions.
Is fundamental analysis enough for investing? ›
Why Is Fundamental Analysis Important? Fundamentals allow investors to look beyond short-term price fluctuations and focus on the underlying factors that drive a company's operations and long-term performance. The main benefit of fundamental analysis is to help quantify the value of a company and its shares.
How to analyse stocks for long-term investment? ›
Let us begin with the basics.
- The secret of how to choose stocks for the long term - Fundamental analysis. ...
- How to choose the top stocks for long-term investments - Key strategies. ...
- Check the P/E ratio. ...
- Look for dividend-paying stocks. ...
- Analyse the company's earnings. ...
- Beware of value traps. ...
- Evaluate the company's management.
Technical analysis provides traders with tendencies and tools that help to forecast and make money on fluctuations in the price of a security. On the other hand, Buffett prefers a form of operating that aims at, and creates, long-term value and exercise of careful judgment when investing money.
Do professional traders use technical analysis? ›
Professional analysts often use technical analysis in conjunction with other forms of research. Retail traders may make decisions based solely on the price charts of a security and similar statistics. But practicing equity analysts rarely limit their research to fundamental or technical analysis alone.
Do quant traders use technical analysis? ›
Quant traders typically have access to these tools: Systems for accessing market data, like the Bloomberg data terminal, having the necessary technical and quantitative analysis tools available that fit into their stream of trading (like Bollinger bands, charts, etc.)
Which method is best to analyze an investment? ›
While some investors prefer the use of a single analysis method to evaluate long-term investments, a combination of fundamental, technical, and quantitative analysis is the most beneficial.
Is technical analysis needed for long-term investment? ›
One is that there could be a myth that technical analysis is used for short-term but it is not like that. It can be used and it is actually very much useful for long-term investments also.
One way to determine whether a stock is a good long-term buy is to evaluate its past earnings and future earnings projections. If the company has a consistent history of rising earnings over a period of many years, it could be a good long-term buy.
Do investment bankers use fundamental analysis? ›
Investment Decision-Making: Equity research, mergers and acquisitions, and portfolio management activities are some of the areas where Fundamental Analysis is used by the investment bankers to determine the intrinsic value of the companies.
Why fundamental analysis is best? ›
Long-term perspective: Fundamental analysis provides a long-term perspective, making it suitable for investors looking to hold assets for extended periods. Informed decision-making: It allows investors to make well-informed decisions based on a company's financial health and economic conditions.
Which strategy is best for long term investment? ›
Five principles for a long-term investment strategy
- Match your investments to your goals. ...
- Spread your 'eggs' among multiple baskets. ...
- Don't try timing the market. ...
- Set up a purchase plan–and stick with it. ...
- Keep tabs on your progress.
Both methods are used to research and forecast future trends in stock prices. Fundamental analysis is primarily beneficial for traders who wish to invest on a long term basis. For short term investors, technical analysis is a more preferred technique.
Which indicator is best for long-term investment? ›
The 200-day, 100-day, and 50-day simple moving average are popular choices for investors and long-term trend followers. The moving average can be used in several ways. The first is to look at the angle of the moving average. The price isn't trending but ranging if it's mostly moving horizontally for an extended time.
Why is fundamental analysis best? ›
Long-term perspective: Fundamental analysis provides a long-term perspective, making it suitable for investors looking to hold assets for extended periods. Informed decision-making: It allows investors to make well-informed decisions based on a company's financial health and economic conditions.
Does technical analysis outperform the market? ›
Using technical analysis in trading can help improve your odds, increasing the relative number of successful trades you complete. But it's not perfect. There will always be factors in the market that you can't control. So trading with technical analysis is neither perfect nor black and white.
Can you use both fundamental and technical analysis? ›
Both fundamental and technical analysis can reveal potentially valuable information, and focusing on just one style could cause you to miss important clues about a stock's prospects. And because the intended duration of an investment or trade may change, using both forms of analysis is an approach you might consider.
Is technical analysis enough for trading? ›
Final Takeaway on technical analysis
While it is sure that technical analysis cannot assure a 100% success rate or magically high profits- it is however a very thorough study of how to predict equity market share value and thus can be considered a format of trade prediction.
