Fundamental Analysis

Fundamental analysis involves the use of financial and economic data to evaluate the liquidity, solvency, efficiency and, most importantly, the earnings potential of a given company. The fundamental analyst's kitbag of tools includes the corporate annual report and its financial statements, legal comments by corporate officers, industry statistics and market trends, as well as macro-economic data.

With this information in hand, the fundamental analyst's goal is to ferret out undervalued stocks, and then buy them in anticipation of the appreciation that should occur when this value comes to light.

Technical Analysis

A technical analyst doesn't look at income statements, balance sheets, company policies, or anything fundamental about the company.

Technical analysis looks at the actual history of trading and the price of a security or index. This is usually done in the form of a chart. The financial product can be a stock, future or an index,.

The technical analyst believes that securities move in trends. And these trends continue until something happens to change the trend. With trends, patterns and levels are detectable. Sometimes the analysis is wrong. However, in the overwhelming majority of instances, it's extremely accurate.

Technical analysis is stock market research of price action over time and charts are what an analyst works with as their primary record of price action. Behind every price is an investor who had a reason for buying or selling. Traders generally act alone but often their weight of numbers has a direct influence on short term prices.

Researching the stock market with charts and technical indicators is the study of group behaviour and sentiment. It is done with science and art. We use science because we use mathematical formula, computers and statistics.

Charting is the study of price action of a market itself as opposed to the study of the goods in which a market deals. Technical analysis is simply a different means of using stock market research to arrive at the same investment objectives.

These goals may be summarised as:

* To gauge the relative strength of buyers and sellers;

* To identify preferred times to buy and sell;

* To develop a theory as to how far price may reasonably be expected to move; and

* To formulate a risk strategy.

Jon Lynch is Marketing Manager of the Capital Intelligence Group of companies, including HomeTrader - Australia