Technical analysis and fundamental analysis both are used for the 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 are two different thoughts when you want to analyze financial markets.
Fundamental analysis is a method of analyzing securities or any financial product 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 the income statement, balance sheet, overall management and cash flow of the company. It helps in determining the growth prospect of the company, which ultimately provides a base to investors for long-term investment.
Fundamental analysis – Key Elements:
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 a 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 the 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 the P/E ratio always.
Technical analysis is a method of evaluating 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.
Technical analysis – Key Elements:
Here are some crucial aspects related to the technical analysis in share market trading:
Chart patterns: It shows two important patterns, one is a 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 support.