Investment decisions are assisted by two major schools of stock analysis: fundamental analysis and technical analysis. .
Fundamental analysis is the valuation of stocks based on fundamental factors such as company earnings and growth prospects. It involves the use of financial statements to determine a company's financial strength and whether the company's stock is valued correctly. Fundamental analysis also looks at the company's position in its industry along with any current events that involve the company's operations. Overall, fundamental analysis focuses on the "basics" of a company. One of the most well-known ideas in fundamental analysis is "Top-Down" analysis. This looks at the economy as a whole, then the industry, then the company. The analysis of the economy allows investors to find business cycles, unemployment rates, GDP growth and many other indicators. Analysis of the industry separates the strong and weak companies in that industry. Finally, when you look at the company, you can find out if that company is a good investment based on the "basics" of that company. .
Technical analysis is an analysis of price and volume data as well as other related market indicators to determine past trends that are believed to be predictable into the future. Charts and graphs are a major tool in technical analysis. Technical analysis pays no attention to financial statements. Market statistics and market trends are the basis of this analysis. The statistics and trends are used to predict the performance of securities so that investors know when the best time is to invest. Many technical indicators have been developed to predict performance, but the major flaw with technical analysis is that all of the indicators are only good to the people that know how to use them. To be an effective technical analyst (chartist), you need to have a lot of experience in studying the indicators and knowing how to interpret them.