Technical Analysis Vs Fundamental Analysis

Technical analysis and fundamental analysis both are used for analysis of stocks. Both evaluate the stocks in two different ways.  Technical analysis takes into account charts, whereas fundamental analysis is based on the financial statement.

Technical analysis vs Fundamental analysis is two different thoughts when you want to analyze financial markets.

Fundamental Analysis:

Fundamental analysis is a method of analyzing a security in order to know about its intrinsic value for long-term investment opportunities. It examines the financial statement of a company, economic, political and other qualitative and quantitative factors.

So, if you want to know about the health of the company, fundamental analysis is the best option. It examines income statement, balance sheet, overall management and cash flow of the company. It helps in determining growth prospect of the company, which ultimately provides a base to investors for long-term investment.

Important key elements of Fundamental analysis:

Here are some crucial aspects related to the fundamental analysis in share market trading:

  • Earnings: Before investing in any company, you would like to know about the earnings of the company. How much company is earning on which its growth depends? So, Earning per share (EPS) is the simplified form of earning.
  • Profit margin: Earnings alone cannot say enough about the company. If earnings of the company increase and at the same time expenses also increase, it means profit margin is not good. So, you must always take care of increasing margin, which says that the company has better control over its expenses.
  • Return on equity (ROE):  It is a ratio which measures the efficiency of the company in generating its profit. This ratio is important in the fundamental analysis because it measures several factors like leverage, profits, margins, revenue and returning value to shareholders.
  • Price to Book (P/B):  This ratio compares a stock’s market value to its book value. Actually, this ratio tells you that what will be the residual value if the company went bankrupt.
  • Price-to-earnings (P/E): It is a ratio which measures current share price of the company relative to its earnings per share. This ratio gives investors a better idea of the value of the company. But you cannot rely on P/E ratio always.

Technical Analysis:

Technical analysis is a method of evaluating a security and forecast its future price on the basis of price movement and volume.

So, technical analysts focus on price movement charts, the volume of the stock and other analytical tools to know about the strength or weakness and future price of a stock.

Important key elements of Technical analysis:

Here are some crucial aspects related to the technical analysis in share market trading:

  • Chart patterns:  It shows two important patterns, one is continuation pattern which signals that a prior trend will be repeated once the pattern is complete. And second is the reversal pattern, which signals that a prior trend will reverse, after completion of the pattern.
  • Price action: It refers to the movement of a stock price that traded in the market in past. On the basis of past price movement, investors try to understand the psychology of the crowd.
  • Technical indicator: A technical indicator is an art of forecasting future price on the basis of past price movement of a stock. The moving average convergence-divergence (MACD) is one of the most popular technical indicators.
  • Resistance and support levels:  Resistance is the point where traders are ready to sell the stock because they think that the price will not increase any further. Whereas, the support level is a buying opportunity by taking stop loss as a support.

Technical Analysis Vs Fundamental Analysis

  1. Technical analysis begins with charts. Whereas, fundamental analysis begins with financial statements of the company.
  2. Technical analysis focuses on internal market data. While, fundamental analysis focuses on company, industry and economic statistics.
  3. Time horizon: Technical analysis is a short-term approach to investing. On the other hand, fundamental analysis is a long-term approach to investing.
  4. Technical analysis is done with a view of short to medium term goals, where you can flip the stock. But fundamental analysis is done with a view of long-term investment.
  5. Fundamental analysts estimate the intrinsic value of the stock and buy when market value is less than intrinsic value. While technical analysts believe that there is no real value of any stock.

Technical Analysis Vs Fundamental Analysis: Comparison table

Here is a quick look at some of the differences between the two approaches to share market analysis:


Summary of Technical Analysis Vs Fundamental Analysis

  • Fundamental analysis is a long-term approach, whereas technical analysis is a short-term approach.
  • The main purpose of the fundamental analysis is the investment; on the other hand, technical analysis is for trading purpose.
  • Fundamental analysis is done by looking into past and present both information and data, but technical analysts look backwards only.
  • In fundamental analysis Stock can be bought when market value is less than intrinsic value, whereas, in technical analysis, traders buy stock when they think the stock price is lower.

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