Technical vs Fundamental Analysis for Kids and Teens
This video compares technical and fundamental analysis in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about fundamental and technical analysis differences, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Kindergarten
- Elementary School
- Middle School
- High School
The topics covered are:
- What is technical analysis
- What is fundamental analysis
- What are the key differences between fundamental and technical analysis
- Fundamental analysis vs technical analysis: Which one should you use
What is technical analysis?
Technical analysis is a methodology used to predict future price movements of a stock based on its past performance.
It relies heavily on charts that show the past price and trading volume as well as statistics such as trend lines, moving averages, patterns, etc.
The underlying belief behind technical analysis is that price moves in trends, and history repeats itself.
What is fundamental analysis?
Fundamental analysis is used to evaluate a stock by measuring the company’s ‘intrinsic value’ or fair value, to decide if it’s undervalued or overvalued. This is done by taking a holistic look at the company’s performance, the industry conditions and the overall economic factors.
It involves analyzing financial statements that detail the company’s revenue, expenses, assets, and liabilities; as well as financial ratios like the company’s P/E ratio, profit margin, etc.
It also looks at external factors such as the growth rate of the economy and GDP, inflation rate, government policies, industry trends, competitor performance, and more.
Fundamental analysis assumes that it takes time for the stock price to adjust based on the fundamentals, and therefore you can gain by buying an undervalued stock and holding it for the long term.
Technical vs fundamental analysis: Key differences
At a high level, fundamental analysis takes a long term approach with an objective of investing, whereas technical analysis takes a short term approach with an objective of trading.
Fundamental analysis uses past and present data to help decide whether an investment is worthwhile in the long term.
On the other hand, technical analysis uses only past data to decide the best time to buy or sell a stock in the short term.
Therefore, fundamental analysis is typically used by buy and hold investors whereas technical analysis is used by day traders to make quick decisions.
Fundamental vs technical analysis: Which one should I use?
Overall, fundamental analysis is an excellent way to find solid investments for the long term – there aren’t any disadvantages other than it being somewhat time consuming. It doesn’t take special qualifications, and the information required is easily available online.
On the other hand, technical analysis is not a good way to analyze investments for individual investors like you and me, as it is meant for short term day trading – which we shouldn’t be doing anyway.
Of the two, fundamental analysis is the clear winner for individual investors trying to decide what to invest in.
However, it’s actually possible to skip the ‘analysis’ step entirely – if you invest in index funds!