The Difference Between Fundamental and Sentiment Analysis

When examining the market, there are a number of different ways to determine the state of investments. Two of these are fundamental and sentiment analysis, which have their own set of distinct characteristics. Let’s look at the differences between these two methods of analysis.

What Is Fundamental Analysis?

Fundamental analysis relies on the utilization of real data in order to evaluate the value of a security. This is a big picture view into the economy as well as industries that could affect the stock. A fundamental analyst will look at the way a company is being managed, its financial stability and condition, income statement, balance sheet, and cash flow when trying to make a decision on whether it may be a good idea to invest or not. Ideally, they are looking for stocks that are trading below their intrinsic value because they are usually ideal investment opportunities.

Sentiment analysis is very different, and involves looking into the mood or feeling behind certain companies and investment opportunities rather than the cold hard facts.

What Is Sentiment Analysis?

This form of analysis has been around for some time, but the latest technologies have made it much easier to carry out on a larger scale. For example, many companies are utilizing software that informs them of the “conversation” on the web regarding their company. It can alert them to trends associated with their brand and problems that might crop up. Similar technology is in use for financial sentiment analysis.

Consider the amount of user-generated content that’s online. The information that is available on the web, once gathered and parsed by the right type of software, can provide you with a general outlook of your brand. Evaluating public sentiment provides insight into how a business is doing, which in turn can affect how people feel about buying stocks in a company. This analysis method has the potential to be valuable for businesses, as well as for investors. New tools are making it much easier to get a better understanding of consumer sentiment, and those tools are becoming more efficient each year.

Which Is Best?

It is very difficult to determine the best type of analysis when it comes to making investment decisions. It’s generally a good idea to consider several different elements, and not to rely on one type of analysis. Both types are valid and can be used in conjunction with one another to evaluate opportune investments. For example, if you discover that a stock seems to be worthwhile based on fundamental analysis, but find that public sentiment is lackluster, you would know to hold off on buying.

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