Types of Stock Analysis: Fundamental, Technical, & Sentimental

Dabbling in the world of stock analysis is like being a detective.

But instead of solving crimes, you're trying to predict the future of a company's stock. And just like any good detective, you have a calculated approach to studying the situation (stock): Fundamental, Technical, and Sentimental.

So, whether you're a financial sleuth, a chart wizard, or a sentiment savant, stock analysis has something for you. Just remember, past performance is not indicative of future results…and always keep an open mind.

What is stock analysis? (The short answer)

Simply put, stock analysis is the process of studying financial information and market trends to predict how a company’s stock will perform. It can be used by both investors and traders to decide which stocks they should buy or sell.

Let's quickly go over the three types of stock analysis with the analogy of the detective. We'll dive deeper into them in the later sections.

1. Fundamental Analysis is like looking at a company's fingerprints. You examine what makes the company unique by looking at financial statements, management, and industry trends to get a sense of its overall health.
2. Technical Analysis is like studying CCTV footage. You look at charts and past stock prices to predict future movements.
3. Sentimental Analysis is like reading a company's diary. You look at news articles, social media, and analyst reports to gauge how the market feels about a company.

Fundamental Analysis: Look at the “fundamentals” of a company to assess its long-term value.

This kind of analysis is mainly used by investors who are seeking to buy stocks and hold them for several years. It involves looking at the financials, like a company’s income statement, balance sheet, and statement of cash flows, to evaluate the company’s overall health.

Fundamental analysis also includes looking at a company’s management, industry trends, and competitive landscape. By examining this data, investors can determine if a company is undervalued or overvalued and make educated decisions about when to buy or sell stocks.

For example, if you're interested in investing in Apple Inc. (AAPL), you would look at its financial statements, management team, and industry trends to determine if it's a good long-term investment. With a tool like Wisesheets, you can dump years of historical statements and stock prices in real-time onto a spreadsheet, analyze the data, and make smarter decisions with your investments.

Check out our guide on how you can find the best stocks on your own: How to Create Your Own Custom Excel Stock Screener.

Pros

• The ability to evaluate a company's long-term potential and identify undervalued stocks.
• Provides a comprehensive understanding of a company's financial health and future prospects.
• Can help identify companies that have a sustainable competitive advantage.
• Helps investors make informed decisions based on a company's actual financial performance rather than market sentiment.

Cons

• Can be time-consuming and require a significant amount of research and analysis.
• May not always provide a clear picture of short-term stock movements.
• Some financial metrics may be more difficult to interpret than others.
• It may not take into account unforeseen events that can impact a company's performance.
• It may not provide a complete picture of a company's long-term potential, and it can be affected by unpredictable events.

Best for

Fundamental analysis is best for you if you have a long-term investment horizon, have a low-to-medium risk tolerance, and have an analytical and detail-oriented personality. You're patient and willing to do research (evaluating a company's financial statements, management, and industry trends ) and analysis to gain a comprehensive understanding of a company's financial health and long-term potential.

To get started with learning fundamental analysis, check out:

1. Security Analysis by Benjamin Graham and David Dodd – This classic book provides a comprehensive overview of fundamental analysis and is often referred to as the "bible of investing".
2. Udemy's Complete Value Investing Course (Updated 2023) – With over 1500 ratings, this course covers the principles of value investing, including financial statement analysis, valuation techniques, and stock selection strategies
3. Grab our FREE Fundamental Excel Stock Analysis Template to get started with no hassle.

Technical Analysis: Analyze trends and patterns in a stock’s price history to predict future movements.

Both investors and traders use this kind of analysis to identify short-term opportunities. It involves studying charts and past prices for stocks, commodities, or indices to try to forecast the direction in which they will move (up, down, or sideways).

Technical analysts look for patterns, like support and resistance levels, and use indicators, such as the Relative Strength Index (RSI), Moving Averages (MA), or Bollinger Bands to make their predictions. For example, if you want to trade Facebook Inc.(FB), you would analyze its historical price data and look for patterns to determine if it is likely to rise or fall in the near future.

Pros

• Ability to identify short-term trading opportunities.
• Provides insights into market sentiment and investor behavior.
• Can be useful for identifying patterns and trends in a stock's historical price data.
• Can be used in conjunction with other forms of analysis to make more informed investment decisions.

Cons

• May not provide a complete picture of a company's long-term potential or its underlying fundamentals.
• Can be affected by unpredictable events that can impact a stock's price.
• Some traders may rely too heavily on technical analysis and ignore important fundamental factors.
• May not be suitable for long-term investment decisions.
• Will take time and experience to interpret the charts and indicators correctly.

Best for

Technical analysis is best for those with a short-term investment horizon, a medium-to-high risk tolerance, and a more visual and pattern-oriented personality. You like searching for short-term trading opportunities by analyzing charts and historical prices, and you're comfortable with using mathematical indicators and algorithms.

To get started with learning technical analysis, check out:

1. Technical Analysis of the Financial Markets by John J. Murphy – rated 4.6 on Amazon (1800 reviews), dive into the newest features of computer technology, technical tools and indicators with this book's second edition. Discover insightful content on candlestick charting, Intermarket relationships, stocks, and stock rotation – all depicted through state-of-the-art examples and figures that will get you up to speed in no time.
2. The Trading Channel on YouTube – this channel is great for those who are visual learners – with almost 2 million subscribers, you'll find plenty of educational content on technical analysis.

Sentimental Analysis: Gauge the market’s overall sentiment towards a company by looking at news articles, social media, and analyst reports.

Sentimental analysis is a relatively new form of stock analysis that looks at external factors, like news stories or analyst opinions, to try to assess how investors feel about a particular company. By considering sentiment along with fundamental and technical indicators, traders can get a better sense of whether the market is bullish or bearish on a particular stock.

Let's say you want to invest in Tesla, Inc. (TSLA). Through sentimental analysis, you would examine news articles, Tweets, and analyst reports to gauge the market's overall sentiment toward the company. And if you find a lot of positive news articles and analyst reports about Tesla's new electric vehicle models, along with a ton of social media buzz on the company's future prospects, you may conclude that the market has a bullish sentiment toward the company. Based on this information, you may decide to buy shares of Tesla.

Pros

• Provides insight into market sentiment and investor behavior.
• Can be used in conjunction with other forms of analysis to make more informed investment decisions.
• It can provide early warning of potential issues that may not be reflected in the company's financial statements yet.
• Can help identify companies that are receiving a lot of positive press and analyst coverage.

Cons

• May not provide a complete picture of a company's long-term potential or its underlying fundamentals.
• Some traders may rely too heavily on sentimental analysis and ignore important fundamental factors. It may not always be accurate, and predictions are not always right.
• It may not take into account unforeseen events that can impact a company's performance.

Best for

Sentimental analysis is best for you if you have a medium-term investment horizon with medium-to-high risk tolerance and a more intuitive and news-oriented personality. You're more concerned with the market's overall sentiment towards a particular company and the external factors that may impact the stock's performance. You're comfortable with using news articles, social media, and analyst reports to gauge how the market feels about a company.

To get started with learning sentimental analysis, check out:

1. Here's a comprehensive article guide on Sentimental Analysis by MonkeyLearn. It covers everything from the different types, challenges, along with tools and tutorials.
2. SentimentEdge Report provides you with exclusive, unprejudiced sentiment analysis and trading ideas from the experienced market analyst, and trader Jason Goepfert. You can use these actionable insights to make informed decisions that will help your business maximize its potential.

How the three stock analysis methods come together

When using all three methods together, it's important to consider the strengths and weaknesses of each approach.

For example, fundamental analysis may provide a clear picture of a company's long-term potential, but may not reflect the current market sentiment. Technical analysis, on the other hand, may provide insight into short-term trends, but may not take into account important fundamental factors like a company's earnings or balance sheet. And sentimental analysis can reveal investor behavior and market sentiment not shown by the other two methods. But it may not always be accurate, and predictions are not always right.

By combining all three methods, you can gain a more comprehensive understanding of a stock's potential. For example, if a company's financials look strong according to fundamental analysis, but the stock's price is currently in a downtrend according to technical analysis, and there is negative sentiment about the company in the news and on social media according to sentimental analysis, it might be a good idea to wait before buying shares.

In addition, keep in mind that no single analysis method is foolproof and that no one-size-fits-all approach to stock analysis. As with any investment decision, it’s important to do your research and consult with an experienced financial advisor before making any trades.

Related: How Long Does It Take to Learn The Stock Market? (Answered)

Parting words

At the end of the day, there’s no one-size-fits-all approach to stock analysis. As with any investment decision, it’s important to do your research and consult with an experienced financial advisor before making any trades. By understanding these three types of analysis, you can tailor your approach to better understand the situation at hand and make more informed decisions.

Related: The Best Stock Comparison Tools by Category (2023)

Lastly, if you’re looking for a trusty sidekick in your stock analysis journey, look no further than Wisesheets, which gives you all the numbers on any stock so you can make informed decisions like a pro.

To your investment success! 📈