Fundamental and Technical analysis are terms used in the share market trading. Fundamental analysis consists of analyzing the intrinsic/internal value of stock/security.
The value of assets is affected by both macroeconomic and microeconomic factors. This value acts as a standard measure enabling the trader to understand whether the security is undervalued or overvalued.
Key Takeaways
- Fundamental analysis evaluates a companyโs financial health and intrinsic value by examining financial statements, industry trends, and market conditions.
- Technical analysis focuses on price patterns, historical data, and trading volume to predict future price movements and identify trading opportunities.
- Fundamental analysis suits long-term investment decisions, whereas short-term traders and speculators favor technical analysis.
Fundamental vs Technical Analysis
The difference between fundamental and technical analysis is that fundamental analysis is done for long-term trading purposes. In contrast, technical analysis is done for short-term trading purposes.
Technical analysis, on the other hand, is not based on the intrinsic value of the stock. The purpose of technical analysis is to find the predicted security values.
This is more focused on short-term gains through the trading of the security. It focuses on the market trends and the possibilities of an increase/decrease in share prices.
Even though both types of analysis are used in the stock market, their purpose is entirely different, and these analyses have other variables considered.
Comparison Table
| Parameter of Comparison | Fundamental Analysis | Technical Analysis |
|---|---|---|
| Meaning | This type of analysis is done considering the stockโs internal value. | This type of analysis is done while considering the future prices of stock, i.e., external value. |
| Purpose | Its purpose is to find the internal value of the stock. | It aims to find the right time to enter/exit the market. |
| Function | This type of analysis is used in investing. | This type of analysis is used for trading. |
| Focus | Takes into consideration data from the past as well as the present. | It only considers past data. |
| Duration | Relevant for long-term investments. | More relevant for shorter duration investments. |
| Basis of Decision | This type of analysis makes decisions based on available information and evaluated statics. | In this type of analysis, decisions are made on stock prices and market trends. |
What is Fundamental Analysis?
The fundamental analysis enables a trader to find out the fair value of the stock. This value, compared to the market prices, allows the trader to determine whether the stock is undervalued or overvalued.
This analysis considers both past data and present data, unlike technical analysis. It is not done for short-term trading purposes.
Fundamental analysis has a broader scope, encompassing financial analysis, economic conditions, industry analysis, and future profitability. It also takes into consideration every aspect of economics, any variable that might have an impact on the price of the stock.
Stock is found to be undervalued when the intrinsic value of a stock is higher than the market price. In such a case, a recommendation to buy is given.
Such analysts are searching for undervalued or overvalued stocks currently being traded. These are long-term position traders.
This is because they analyze to invest for the long term. Fundamental analysis is of two types.
First is the top-down analysis. In this type, the study begins from the market, which is then narrowed down consistently from sector to industry and company.
Second is the bottom-up analysis. This is the opposite of top-down analysis.
In this, the analyst takes a specific stock and moves their way up, including all the factors that might affect the stock prices. Now, fundamental analysis is constructive in understanding the worth of an asset.
But it has its drawbacks. It is a very lengthy and time-consuming process which can get extremely complicated.
It only assists in long-term decision-making.
What is Technical Analysis?
Technical analysis is more focused on determining the external value of the stock. Such analysts do not pay attention to the undervaluation or overvaluation of the store.
They try to understand the stock market trends by studying moving averages, indicators, oscillators, and charts. Their primary purpose is to find out the most lucrative times for entering or exiting the market.
Thus, technical analysis is done for short-term trading purposes. It also focuses only on the present situation, unlike fundamental analysis, which focuses on the current and the past.
Swing traders or short-term day traders use this analysis, and the main output of the study is relevant for short-term investments. Their primary purpose is trading and not investing.
The tools of technical analysis, such as support and resistance levels, moving averages, etc., tend to explain the trends that are going on in the market, thereby assisting the traders. This analysis helps traders to make short-term gains and is very commonly used.
But since the data of this analysis is based on just the present data, the market trends tend to be unpredictable. Thus, it is a rigorous analysis, making it challenging to assume any future event.
Main Differences Between Fundamental and Technical Analysis
- The fundamental analysis determines the internal value of the security. In contrast, technical analysis determines the future prices of the stock.
- Fundamental analysis is done mainly to invest, whereas technical analysis is done for trading.
- Fundamental analysis is done for long-term purposes. On the other hand, technical analysis is done for short-term goals.
- The decision in the fundamental analysis is based on past and present data, whereas technical analysis decisions are only based on current data.
- Fundamental analysis is focused on estimating the stockโs current value (intrinsic value), whereas technical research focuses on assessing the marketโs entry and exit time.ย
- https://scindeks-clanci.ceon.rs/data/pdf/2334-735X/2016/2334-735X1602026P.pdf
- https://repub.eur.nl/pub/10891/ERS-2007-096-F&A.pdf
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
