Understanding the difference between fundamental analysis and technical analysis

There are different ways to analyse the stock market used by different investors and traders. Two common ways to evaluate it include fundamental and technical analysis. Both these types are very different from each other and must be thoroughly understood before applying any of these. 

With the different focus of each of these analyses, different investors use different analysis types while others also blend the two. In this article, we will look at the difference between fundamental analysis & technical analysis to give the readers a better understanding of the two. 

What is fundamental analysis?

The fundamental analysis aims at evaluating the intrinsic, the actual value of the security or the market. It is an approach mostly used by people looking at the long-term value of security. The fundamental analysis is used by people to evaluate the balance sheets, cash flow statements and income statements of a company. 

In simple words, those performing a fundamental analysis are aiming to examine how well the company will perform in the future compared with its current net value. The outcome of the fundamental analysis determines whether the investment is good or bad and influences the buying, holding and selling decisions. Any stock that is currently below its intrinsic value is seen as promising while those trading above its intrinsic value is not considered as promising. 

The main tools used in fundamental analysis include financial statements, economic indicators, interest rates, news and events, and qualitative information. Every factor that can potentially influence the price of the security is carefully evaluated in this analysis. It takes into account both microeconomic and macroeconomic factors that can affect the price. 

The only downside of fundamental analysis is that even if one factor determining the price is misinterpreted, it can lead to a false judgment about the intrinsic security value. 

What is technical analysis? 

Technical analysis on the other hand looks at the price of securities such as stocks and currencies to understand the price and volume of shares over time. The investors doing a technical analysis believe that the markets are inefficient and they can use the price patterns and market trends to make a profit. 

Some of the main tools used for technical analysis include volume analysis, relative strength, chart pattern analysis, candlestick pattern analysis, trend analysis, etc. The tools are employed to get an idea of the future price of the security in the market. 

The price analysis happens with the assumption that all the factors that influence the stock price are already included in the stock price. The analysts determine a high and low price range for the stock known as support and resistance. 

Difference between fundamental and technical analysis 

With an understanding of fundamental and technical analysis in detail, let us now look at the difference between fundamental analysis and technical analysis. The key difference between the two include: 

1. Purpose

The purpose of fundamental analysis is to understand the fundamentals of security through its financial management, performance and overall market conditions. On the other hand, the purpose of technical analysis is to study the market or security patterns through trade volume and historical price movements. 

2. Usage

The next distinguishing factor between the two is usage. The fundamental analysis is ideally suited for investors looking for long-term investments. On the contrary, technical analysis is used by traders for short-term movements. 

3. Buying and selling 

The buying and selling signal for fundamental analysis is overvalued and undervalued stocks. The buying and selling signal for technical analysis is support and resistance, momentum-based indicators, moving averages and trend lines. 

4. Subjectivity 

The fundamental analysis consists of qualitative factors such as market reputation, brand value, management quality, etc. As a result, these factors can be subjective and might vary from one analyst to the other. 

As against this, technical analysis is dependent on psychological insights drawn from the psychology of traders in the market and is relatively less subjective. 

How to choose between fundamental and technical analysis? 

There are broadly two kinds of investors and traders in the market, long-term and short-term. The choice between fundamental and technical analysis is also based on the investment tenure. Let us look at what is fundamental analysis and technical analysis in terms of the investment tenure: 

1. Long term investment 

A long-term investment requires a more thorough analysis and the investors usually depend on fundamental analysis. By examining the intrinsic values, the investors gauge an idea of which investment will pay back greater returns in the long run. However, some investors also look at a blended approach of the two analyses to understand the pros and cons of long-term investment. 

2. Short term investment

For traders and investors looking to examine the short-term potential of security, they use technical analysis. The data used for this analysis is short-term historical data which cannot make long-term predictions. 

By evaluating the market conditions and the security performance, short-term traders desire to benefit from the gaps in the market. As a result, technical analysis is best suited for short-term investments. 

Conclusion 

Both fundamental and technical analysis are different types of analysis conducted based on the individual requirements of the investors and traders. It is crucial to understand equity research fundamental and technical analysis to know which analysis is better based on your requirements. When looking at long-term investments, it is better to undertake a fundamental analysis and when looking at short-term investments, undertake the technical analysis. To know more, subscribe to StockGro. 

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