Difference Between Fundamental and Technical Analysis

In the share market, investors require some mechanism to decide where to invest. To understand fundamental vs technical analysis, they are two crucial subjects that help in finding stocks to invest. Many investors tend to get confused with differentiating the two. In this article, we will take a closer look at the difference between fundamental analysis and technical analysis for a better understanding.

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.

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Frequently Asked Questions (FAQs)

No, fundamental analysis is not necessarily easier than technical analysis. Both methods require a deep understanding of the financial markets and the ability to analyse complex data. However, fundamental analysis may be more difficult for beginners because it requires a knowledge of accounting, economics, and finance.

There is no one-size-fits-all answer to this question. The best analysis method for you will depend on your investment goals, risk tolerance, and time horizon. Fundamental analysis is often considered to be better for long-term investors, while technical analysis is often considered to be better for short-term traders.

The debate over fundamental analysis vs. technical analysis has been going on for centuries. There is no clear consensus on which method is better, as both have their own strengths and weaknesses. Ultimately, the best way to decide which method is right for you is to learn about both and experiment with them to see which one works better for you.

There are many resources available to help you learn fundamental and technical analysis of stocks. You can read books, take courses, or watch online tutorials. It is also a good idea to practise with real-world data to see how the different methods work.

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