Market experts use two major methods for analyzing the stocks viz. fundamental analysis and technical analysis. These two methods are completely different from each other and present a totally contrasting approach to trading in securities.
In this article, I will talk about the difference between fundamental and technical analysis, discuss the advantages & disadvantages of both methods, and answer if one approach is better than the other. By the end of this article, you will completely understand the basic process of fundamental analysis vs technical analysis.
Note: These methods are also used for trading in other financial instruments like commodities, currencies, indices, and debt.
Difference Between Fundamental Analysis And Technical Analysis
Fundamental Analysis Of Stocks
Fundamental analysis uses a company’s financial data, market, & economic conditions, and company’s management forward-looking statement to predict the future price of a stock.
In this method, an analyst tries to find the intrinsic value of a stock by looking at various parameters. She/he analyzes parameters that are specific to a company e.g Earnings, expenses, assets, and liabilities. She/he compares them against the competition & industry averages and attempts to determine the intrinsic value. The analyst may also consider general economic conditions, market demand, political equations, global constraints, etc. before fixing the value of a stock.
Technical Analysis Of Stocks
Technical analysis uses past price and volume data of a stock to predict future movement in price.
In this method, the stock’s price and volume are the governing factors – the intrinsic value of a stock is not important. The major assumption is that all fundamental factors are known and are factored into the current price; thus, there is no need to pay close attention to them. Technical analysts use stock charts to identify patterns and trends to understand what a stock will do in the future.
Comparison Of Fundamental And Technical Analysis
Purpose Find the intrinsic value of a stock find the entry & exit prices of a stock
to determine if it is investible for the future
How By studying company reports, analyzing By looking at historical statistical data on
competition, & understanding the price & volume and understanding the chart
industry patterns
Assumption There is an intrinsic value of a stock The value of the stock is not important;
But market is mispricing the stock. Price discounts all the information that is
available to the public & Price movements
happen due to human psychological
behavior
Future Price Ultimately, market will realize the Past trend in stock price movement will be
intrinsic value and give a fair price to repeated in future
the stock
Utility It tries to find the undervalued and It tries to find the perfect timing to enter &
Overvalued stocks exit a stock
Main Function Investing Trading
Data Gathered Financial statements, industry reports, Charts
From competitors reports
Indicators ROE, P/B, P/E, EPS Growth Moving averages, price data, volume data
Chart patterns
Analysis Historical data, projections, & forward Historical data only
looking statements
Profit/Loss Potentially high profit or loss Profit and losses are limited
Time taken before
Time taken after
Time Frame Long term – few months to years short term – intra-day to few months
Which Approach Is Better For You?
Do you believe in reading charts and looking at trends? If yes, then you have a mindset based on Technical analysis. Or do you believe in making investment decisions based on Financials, Growth, and EPS? Well, then you have a mindset based on fundamental analysis!
No doubt, that some may find both types of analysis useful for examining market action. It’s just that they both have a different School of thought. Your trading style and attitude will determine the kind of analysis beneficial for you.
One approach is not necessarily better than the other. You can use either fundamental or technical analysis to create wealth. Both of them can make money for you.
But many experts use them together for stock picking since both of them complement each other. The former tells us the right stock to buy whereas the latter tells us the right time to buy.
If you have devoted time to stock market analysis you can learn both approaches. You can also use a hybrid techno-fundamental approach to make huge profits.
Final Thoughts On Fundamental Analysis Vs Technical Analysis
Many market experts take a side in the fundamental analysis vs technical analysis debate. They take proclaim that one approach is better than the other.
I believe it is good to understand the difference between fundamental and technical analysis but you can use both of them as appropriate. These are two contrasting approaches to stock trading. One is not necessarily better than the other. They can be used together while analyzing the stocks.
This blog is focused on a technical approach towards stock trading. Most of the blog articles explain some aspects of technical trading. This does not mean that technical analysis has the potential to give us more profit or that fundamental analysis is inherently bad.
We have created this blog so that readers can start profiting from trading immediately. You can start making small profits from intraday trading whereas fundamental analysis may take months or years to create wealth.
