One of the key components of analyzing whether or not to buy a stock is the examination of some important numbers. These numbers (earnings, revenues, price/earnings, multiples etc.) inform our thinking on where a company's stock should go. We compare what appears to be a good company to its competition and then decide whether or not the price is a good value.

Traditional fundamental analysis in simple terms is to buy what is felt to be a good stock at a good price - eg: $10, and then hold on to this stock to sell it some years later at a reasonable price - eg: $30. Using the fundamental approach by itself however,  cheats the investor out of opportunities created when a stock heads up that road from $10 to $30. In this journey, the stock may well go to $20 then drop back to $12, before it makes its way to the $30 top end.

The fundamentals generally tell us what to buy or sell. Fundamentals identify what a company stock should be selling at, but they do not explain why a stock is not selling at that price. It is important to know not just what the company's "fundamental" value is, but to know in which direction the price of the stock is heading - up or down. For this knowledge, we need to consider the two other components.