The Short Version
There are two broad approaches analysts use to evaluate a stock. Fundamental analysis studies the health of the underlying business — its earnings, debt, growth, and management — to estimate what the company is actually worth. Technical analysis instead studies price charts and trading patterns, on the theory that price movements and volume reveal supply/demand trends that can predict future moves. Most professional analysts use a blend of both.
Explain It Like I'm 10
Say you're picking a kid to be on your kickball team. There are two ways to decide. You could actually watch them practice, ask how fast they run, and see if they're a good teammate — that's like 'fundamental analysis': studying the real qualities of the thing you're picking. Or, you could just look at a chart of how they've been picked in games over the last month, and try to guess based on the pattern whether they'll get picked again — that's like 'technical analysis': using patterns instead of studying the actual player.
Most really good team captains (and most professional stock analysts) use a mix of both — they check if the player is actually good AND pay attention to trends.
Step-by-Step Example
- 1 Fundamental question: Does this company actually make good money, and is it growing?
- 2 You check its 'report card' — the financial statements — to answer that.
- 3 Technical question: Has this stock's price been going up or down lately, and by how much?
- 4 You look at a price chart, not the company's actual business, to answer that.
- 5 A beginner investor typically leans on fundamentals first — it's the difference between 'is this a good company' versus 'is this stock currently popular.'
Quick Recap
- ✓ Fundamental analysis: financial statements, ratios (P/E, ROE, debt levels), industry position, management quality.
- ✓ Technical analysis: price charts, moving averages, volume, momentum indicators (covered later in this guide).
- ✓ Beginners are usually best served by starting with fundamentals — understanding what a business actually does and earns.