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Difference between fundamental analysis and technical analysis of stocks

Do you want to start trading or investing but don’t know where to begin? Do you feel like your trading and investing decisions are based on making guesses? Well, there is a lot more to it than that.

Performing well in trading and investing is more of a science than an art. The first step to becoming a professional is learning about fundamental analysis and technical analysis. These can help you make informed decisions in the stock market.

In this guide, we’ll introduce you to fundamental analysis and technical analysis, and compare the two.

Table of Contents

What is fundamental analysis?

At its core, fundamental analysis is about understanding the true value of a stock. Fundamental analysis involves analysing everything related to a company and its market to estimate the growth potential of a stock.

This method relies on both microeconomic factors (such as the capabilities and effectiveness of the leadership team of a company, the health of their balance sheet, and the quality of their brand) as well as macroeconomic factors (such as the market conditions, and the state of the wider economy).

This allows an investor to evaluate whether the price of a company’s stock is undervalued or overvalued. If the investor feels that the stock is undervalued, then they buy the stock since there is a higher likelihood that the stock price will move upwards.

Usually, fundamental analysis relies on publicly-available data on a company and the market. Every listed company in India is legally obligated to release their financial data every quarter so that investors can evaluate the company. Investors can also use other sources such as the news and industry reports.

There are two aspects of fundamental analysis which are quantitative factors and qualitative factors. Quantitative factors can be measured in numbers such as profit and market share while qualitative factors cannot be measured in numbers such as reputation in the market and quality of leadership.

What is technical analysis?

Technical analysis refers to the use of market history, price, and volume to evaluate the future price of a stock. Technical analysis relies on statistical indicators to help traders make decisions. Essentially, this method involves using past performance to predict future behaviour.

Technical analysis consists of several different strategies which involve studying ‘price action’ which is the term used to refer to analysis of the price of a stock. This type of study helps traders understand whether a trend will continue or whether it will change.

Technical analysis is based on the core principle that the current market price already incorporates all the relevant information that may affect the market. This implies that there is no need to consider economic, fundamental or new developments as they have already been factored into the value of a given security.

Technical analysts typically assume that prices move in trends, and the market’s overall psychology tends to repeat itself over time.

The two main forms of technical analysis are chart patterns and technical indicators, which are statistical tools.

Technical indicators involve applying different mathematical formulas to prices and volumes in a statistical manner. Moving averages are the most widely-used technical indicators as they help to simplify the identification of trends by smoothing out price data.

How to choose between fundamental analysis and technical analysis?

Choosing between these two methods is a subject of great debate amongst people involved in the stock market.

Technical analysts tend to believe that the most effective strategy is to track the trend as it develops through market activity, while fundamental analysts argue that the market frequently undervalues assets.

Instead of chart trends, fundamental analysts focus on checking a company’s balance sheet and market position to check its actual value.

Some investors have achieved success using either fundamental or technical analysis, and some use a combination of both.

Typically, technical analysis helps make fast trading decisions, while fundamental analysis involves taking more time because of the additional due diligence required.

That’s why technical analysis is usually preferred by short-term traders while fundamental analysis is usually preferred by long-term investors.

Fundamental analysis vs Technical analysis

Now that you know the basics, here is a more detailed comparison between the two.

Basis of Difference	Fundamental Analysis	Technical Analysis
Data	Past and present data are both considered.	Only past data is considered.
Impact of External Factors	Un-impacted	Impacted
Type of Investors	Long-term investors	Short-term traders
Concepts	Return on Equity, Return on Asset, and so on.	Price data, Dow theory, etc.
Interpretation	Backed by qualitative and quantitative factors.	Varies from analyst to analyst.
Methodology	Analyses financial data, competitors, market outlook, and so on.	Analyses market psychology and price trends.

Wrapping up

Overall, it is essential to understand the concepts of fundamental analysis and technical analysis. Once you understand both, you can choose which suits your needs and focus on that method or you can use both. Each method has its own pros and cons and has a different purpose.

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