Difference between fundamental and Technical analysis

13/10/2022 0 By indiafreenotes

Fundamental analysis

Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at opposite ends of the spectrum. Both methods are used for researching and forecasting future trends in stock prices, and like any investment strategy or philosophy, both have their advocates and adversaries.

Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock. Fundamental analysts study everything from the overall economy and industry conditions to the financial condition and management of companies. Earnings, expenses, assets, and liabilities are all important characteristics to fundamental analysts.

It relies on the assumption that there is some sort of delay in influencing the share prices by these fundamentals. So, in the short run, the prices of stocks do not match its value, but in the long run, it adjusts itself. It is a three-phase analysis of:

  • The Economy: To analyse the general economic status and condition of the country. It is analysed through economic indicators.
  • The Industry: To determine the prospects of various industry classification, with the help of competitive analysis of industries and industry life cycle analysis.
  • The Company: To ascertain the financial and non-financial characteristics of the firm to find out whether to buy, sell or hold the shares of the company. For this purpose, sales, profitability, EPS, are analysed along with management, corporate image and product quality.

Technical analysis

Technical analysis differs from fundamental analysis in that the stock’s price and volume are the only inputs. The core assumption is that all known fundamentals are factored into price; thus, there is no need to pay close attention to them. Technical analysts do not attempt to measure a security’s intrinsic value, but instead, use stock charts to identify patterns and trends that suggest what a stock will do in the future.

It is based on the premise that the price of share move in trends, i.e. upward or downward, relying upon the attitude, psychology and emotion of the traders.

Tools used for Technical Analysis

  • Prices: The change in the price of securities is represented in the change in the attitude of the investor and the demand and supply of securities.
  • Time: The degree of price movement is a function of time, i.e. the time taken in the reversal of trend will determine the change in price.
  • Volume: The magnitude of price changes can be seen in the transaction volume that characterizes the change. Suppose there is a change in the price of shares, but there is a small change in the transaction volume, then it can be said that the change is not very powerful.
  • Width: The quality of change in price, is gauged by ascertaining if the change in trend is dispersed across many industries or it is specific to a few securities only. It reflects the degree to which changes in the price of securities have taken place in the market as per the overall trend.

Fundamental Analysis

Technical Analysis

Meaning Fundamental Analysis is a practice of analyzing securities by determining the intrinsic value of the stock. Technical analysis is a method of determining the future price of the stock using charts to identify the patterns and trends.
Relevant for Long term investments Short term investments
Objective To identify the intrinsic value of the stock. To identify the right time to enter or exit the market.
Decision making Decisions are based on the information available and statistic evaluated. Decisions are based on market trends and prices of stock.
Focuses on Both Past and Present data. Past data only.
Form of data Economic reports, news events and industry statistics. Chart Analysis
Future prices Predicted on the basis of past and present performance and profitability of the company. Predicted on the basis of charts and indicators.
Type of trader Long term position trader. Swing trader and short term day trader.
Function Investing Trading