Fundamental Analysis
Fundamental analysis gives insights about the financial state of the company through various data points. With fundamental analysis, an investor can better understand the health of the business before buying its shares. It also considers the financial and economic factors that influence a business. Fundamental analysis involves scrutinising the financial statements, industry performance, and management quality along with ratios like Earnings Per Share, P/E ratio, Dividend yield, etc. In short, a fundamental analyst scrutinises everything from earnings, and expenses to assets and liabilities of the company.
This way, an investor gets to measure the intrinsic value of the company which is further used to identify whether the stock price is overpriced or undervalued.
Technical Analysis
Technical analysts don’t attempt to measure the intrinsic value of a security, rather they use past stock charts to identify patterns and trends that will be suggestive of what a stock will do in the future.
Technical analysis makes predictions on the share price by taking the volume and asset price into consideration. Such an analysis solely takes historical data of the specific stock into account. Technical analysis can help identify the support and resistance levels for a stock price. It can help decide the entry and exit time for a trade.
When Should You Use Fundamental and Technical Analysis?
Fundamental analysis suits investors who are looking for long-term investment whereas technical analysis is suitable for short-term investors.
Long term investing
As the phrase suggests, long-term investing requires a deeper understanding of the company’s business. Any investor who is ready to park an investment for 8 to 10 years or longer in a company’s shares will want to know the financial health of the company. Hence, by analysing different macro and micro data, an investor can identify the intrinsic value or true worth of a stock. With this method, an investor can understand which stock will provide the ideal long-term returns based on their fundamental values.
Short term trading
Technical analysis is a separate branch of study and helps in identifying the short-term earning potential of a stock. The stock price predictions are based on historical data and are purely for short-term objectives. This method can’t be used for making long-term purchases.
Comparison/Difference between Fundamental and Technical Analysis
Basis of Comparison | Fundamental Analysis | Technical Analysis |
---|
Meaning | a company's financial health is assessed through data, such as – company’s assets, liabilities, cash reserves, revenue, profitability, etc. | The pattern of a company's share price is studied on the price charts using various indicators. |
Functionality | Used for long-term investment | Used for short-term investment, intraday trading |
Objective | It is used to check whether the asset is overpriced or underpriced | It is primarily used to find out the right time to enter and exit the market |
Basis of Decision Making | Financial records and ratios help to decide the financial health of the company and whether it is fit for long term investment | Market trends and price of the stock are the basis of decision-making |
Conclusion
Both fundamental analysis vs technical analysis are used by investors around the world for market-related decisions. Fundamental and Technical analysis is both useful and valid, however, they approach the market in different ways. Even though they may come across as different approaches to analysing securities, still it is seen that investors experience success by combining the two techniques. Which one is to be used is totally dependent on the individual investor’s objective. Investors use fundamental analysis when they want to invest for a longer period, whereas traders use technical analysis when they want to use it for quick decision-making in their short-term investments.