Fundamental Vs Technical Analysis: What Is The Difference?
Understanding the difference between fundamental vs. technical analysis is vital when planning to invest in the stock market. The two techniques help investors to assess their stocks and make informed trading decisions. However, they differ in many ways.
Simply put, the fundamental analysis evaluates the financial and economic factors that influence a business. Conversely, technical analysis looks at past market activities and stock price trends to forecast future activity. There are more differences between them.
The good news is, this guide explores the substantial differences between fundamental and technical analysis. You will also learn how to use the methods to your advantage.
That said, let’s dive deeper and establish how technical vs. fundamental analysis differ.
What Fundamental Analysis Means
What’s fundamental analysis? Well, it’s an approach used to evaluate a company and determine the intrinsic value of its stock. It achieves that by analyzing its expenses, revenue, growth prospects, and competitive landscape.
Fundamental analysis computes the financial, economic, and other quantitative and qualitative factors to point the chances where a company’s share value differs from the current price on the market. So, this can help stock traders make buy and sell decisions.
If you plan to use the fundamental approach, you need to execute:
- Company analysis
- Economic analysis
- Industrial analysis
How to Perform a Fundamental Analysis of a Particular Stock
Fundamental analysis can help you determine a fair price for a company’s stock and predict the market’s long-term trends. Here is how to do fundamental analysis.
- Understand a company, including its business model and operations
- Analyze the financial ratios for the first stage screening
- Study the company’s financial reports closely
- Check the company’s rivals and also study them
- Compare the company’s debt with the competitors
- Study the company’s prospects
What Technical Analysis Means
What’s technical analysis? It’s a strategy that helps stock traders to predict the future price of stock active in the market. It bases its prediction on the stock’s performance in the past. Thankfully, that makes it easier to comprehend the future value of the stock.
Traders who opt for technical analysis use chart trends and patterns, price and volume behaviours, and support and resistance levels to pinpoint trading opportunities with high returns. The strategy doesn’t consider economic factors affecting a company’s value.
Here are the tools used in technical analysis.
- Price of Stock or Securities: Changes in an investor’s attitude and the supply and demand of securities represent the change in securities’ prices.
- Time for Price Movements: The degree of price changes is a function of time. In other words, the time taken in the trend’s reversal will influence price changes.
- The volume of Price Changes: One can observe the magnitude of price changes in the transaction volume characterizing the change. For instance, when a change in share prices exists and a slight shift in transaction volumes, you can conclude that the change isn’t significant.
- Width or Quality of Changes in Prices: You can gauge the quality of price changes by confirming if a change in trend is spread across several industries or affects a few securities. Notably, it usually signifies the degree of changes in the price of securities on the market.
Differences between Fundamental Analysis vs. Technical Analysis
The difference between technical analysis vs. fundamental analysis narrows down to what determines the price and value of stocks. The latter considers a company’s value, which depends on its assets’ value and profits the company can generate. The technical analysis considers price action, which determines the stock’s future prices.
Now, let’s look at the other differences between the two approaches in terms of:
- Type of data
- Source of data
- Function served
- Basis of decisions
Fundamental Vs. Technical Analysis: A Comparison Table
The table below compares fundamental analysis and technical analysis based on the factors listed above.
|Basis of Comparison
||Fundamental analysis evaluates the intrinsic value of a particular stock and makes decisions over an investment.
||Technical analysis determines the perfect time to invest or exit the market based on forecasted future prices.
||Fundamental analysis evaluates assets, revenues, debt-equity ratio, liabilities, return on equity ratio, and many other factors to help investors decide.
||Technical analysis makes use of chart trends and patterns, such as price data. RSI, EMA, and simple moving average are the most commonly used indicators.
||Fundamental analysis is suitable for investments that are long-term in nature.
||Technical analysis works best for investments that are short-term in nature.
|Type of Data
||Fundamental analysis focuses on both previous and present data.
||Technical analysis focuses on the previous data only.
||Fundamental analysis helps investigate the ongoing industry trends, economic outlook, financial data, and performance of competitor companies.
||Technical analysis examines the price movements of a particular stock as well as price movements.
||Data for fundamental analysis gets sourced from industry statistics, economic reports, news events, brokerage analysis, and management processes.
||Stock traders usually obtain data for technical analysis from chart analysis.
||Fundamental analysis is ideal for investment purposes. It helps stock traders make long-term investments in a particular stock.
||Technical analysis is ideal for trading purposes. For example, analysts use the technique to identify short- to medium-term trades that allow them to flip a particular stock.
|Basis of Decisions
||Fundamental analysis uses available information and evaluated statistics for the decision-making process.
||Technical analysis use market trends and market prices of a particular stock for the decision-making process.
Can You Use Fundamental Analysis and Technical Analysis Together?
While you may see fundamental analysis and technical analysis as opposing strategies, some investors have become successful by combining the two methods.
For example, an investor can use fundamental analysis to find undervalued stocks then use technical analysis to find a specific exit and entry point. However, the combination can work best when severely sold securities entering the position too early prove costly.
Some investors who primarily use technical analysis may use fundamental analysis to support their trade. For example, an investor can eye a breakout near the earnings report and check the fundamentals to determine whether a stock can beat earnings.
Here are the other scenarios to use fundamental and technical analysis together.
- Use fundamental analysis to build a watchlist for stocks you plan to own, then apply technical analysis to decide if and when to buy them.
- Look at the price chart to know if the market agrees with your valuation or not and have a stronger conviction when moving against the crowd. However, be ready to exit if the fundamentals change.
- A combination of momentum and value can help you pick the right stocks to trade. In other words, stocks on low valuations but with a solid momentum tend to perform better.
- You can sometimes use fundamental analysis to find the most profitable parts of a business cycle. Then, use technical analysis to verify the anticipated trends.
Technical analysis can only analyze past data of a particular stock, while fundamental analysis uses both present and past data. So, when you plan to invest in unlisted stocks, you only have to work with fundamental analysis to make investment decisions. However, when you invest in listed stocks, you can learn a lot from their trading history.