Difference Between Fundamental and Technical Analysis

In share market, investors require some mechanism to decide where to invest. Fundamental and Technical analysis 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 two concepts 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 scrutinizing 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 scrutinizes 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 investment for 8 to 10 years or longer in a company’s share will want to know the financial health of the company. Hence, by analyzing 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 objective. 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	company’s financial health is assessed though data, such as – company’s assets, liabilities, cash reserves, revenue, profitability, etc.	The pattern of 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 under priced	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 and Technical analysis is 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 analyzing 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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