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Difference Between Fundamental and Technical Analysis

Fundamental analysis studies factors like financial statements and management that impact a stock's future price to determine a stock's intrinsic value. Technical analysis uses past stock price patterns and trends to forecast future price movements. Both approaches are used to research and predict a stock's price trend, but they differ in their timeframes, data sources, and objectives. Fundamental analysis takes a longer-term view based on company financials, while technical analysis uses past price and volume data to identify short-term trading opportunities.

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314 views6 pages

Difference Between Fundamental and Technical Analysis

Fundamental analysis studies factors like financial statements and management that impact a stock's future price to determine a stock's intrinsic value. Technical analysis uses past stock price patterns and trends to forecast future price movements. Both approaches are used to research and predict a stock's price trend, but they differ in their timeframes, data sources, and objectives. Fundamental analysis takes a longer-term view based on company financials, while technical analysis uses past price and volume data to identify short-term trading opportunities.

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tungeena waseem
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We take content rights seriously. If you suspect this is your content, claim it here.
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Difference between Fundamental and

Technical Analysis
Fundamental Analysis studies all those factors which have an impact on
the stock price of the company in future, such as financial statement,
management process, industry, etc. It analyzes the intrinsic value of the firm
to identify whether the stock is underpriced or over-priced. On the other
hand, technical analysis uses past charts, patterns and trends to forecast
the price movements of the entity in the coming time.

Stock prices change every minute, and so every investor is keen to know the
future price trends of the stocks of a company, so as to make investment
decisions rationally. For this purpose fundamental analysis and technical
analysis are used to research and forecast price trend of the stock in future.

Content: Fundamental Vs. Technical Analysis


1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

BASIS FOR
FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS
COMPARISON

Meaning Fundamental Analysis is a practice Technical analysis is a method of


of analyzing securities by determining the future price of the
determining the intrinsic value of stock using charts to identify the
the stock. patterns and trends.

Relevant for Long term investments Short term investments

Function Investing Trading


BASIS FOR
FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS
COMPARISON

Objective To identify the intrinsic value of the To identify the right time to enter
stock. or exit the market.

Decision making Decisions are based on the Decisions are based on market
information available and statistic trends and prices of stock.
evaluated.

Focuses on Both Past and Present data. Past data only.

Form of data Economic reports, news events and Chart Analysis


industry statistics.

Future prices Predicted on the basis of past and Predicted on the basis of charts and
present performance and indicators.
profitability of the company.

Type of trader Long term position trader. Swing trader and short term day
trader.

Definition of Fundamental Analysis

Fundamental Analysis refers to the detailed examination of the basic factors


which influence the interest of the economy, industry and company. It is
meant to gauge the actual intrinsic value of a share, by measuring the
economic, financial and other factors (both qualitative and quantitative) to
identify the opportunities where the value of share varies from its current
market price.

The fundamental analysis assesses all the factors that have the capability of
influencing the value of the security (including macroeconomic factors and
organization-specific factors), called as fundamentals, which are nothing but
the financial statements, management, competition, business concept, etc. It
aims at analysing the economy as a whole, the industry to which it belongs,
business environment and the firm itself.

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.

Definition of Technical Analysis

Technical Analysis is used to forecast the price of a share, which says that the
price of a share of the company is based on the interaction of demand and
supply forces, operating in the marketplace. It is used to forecast the future
market price of the stock, as per the past performance statistics of the share.
For this purpose, first of all, the changes in the price of the stock are
ascertained, to know how the price will change in future.

The price at which the buyer and seller of the share, decides to settle the deal,
is one such value which combines, weighs and expresses all the factors, and is
the only value which matters. In other words, technical analysis gives you a
clear and comprehensive view of the reason for changes in prices of a security.

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.

Key Differences Between Fundamental and Technical


Analysis
The difference between fundamental and technical analysis can be drawn
clearly on the following grounds:

1. Fundamental Analysis is a method of examining security so as to


identify its intrinsic value for long term investment opportunities. As
against, Technical Analysis is a method of evaluating and forecasting the
price of a security in future, on the basis of price movement and volume
of transaction. It identifies what a stock will do in future.
2. In fundamental analysis, longer periods are used to analyse stocks as
compared to technical analysis. Hence, fundamental analysis is
employed by those investors who want to invest in stocks whose value
will increase in several years. On the contrary, technical analysis is used
when the trade is for short term only.
3. The time difference between the two analyses is not only experienced in
their approach but in their objective too, wherein the technical analysis
is concerned with trading, fundamental analysis talks about investment.
As most of the investors use fundamental analysis to buy or hold stocks
of the company, whereas traders rely on the technical analysis, to make
short term profits.
4. While fundamental analysis aims at ascertaining the true intrinsic value
of the stock, technical analysis is used to identify the right time to enter
or exit the market.
5. In fundamental analysis, decision making is based on the information
available and statistic evaluated. On the contrary, in technical analysis,
decision making is based on market trends and the stock price.
6. In fundamental analysis, both past and present data are considered,
whereas, in technical analysis, only past data is considered.
7. Fundamental Analysis is based on financial statements, whereas
technical analysis is based on charts with price movements.
8. In fundamental Analysis the intrinsic value of the stock can be
ascertained by analyzing an income statement, balance sheet, cash flow
statement, profit margin, return on equity, price to earnings ratio, etc.
However, technical analysts rely on the chart patterns (such as
continuation pattern and reverse patterns), price actions, technical
indicator, resistance and support, to analyze the future price trends.
Here resistance is the point where the investor is of the view that price
will not rise further and is ready to sell, and support is a point where the
investor is of the view that price will not fall further and is ready to buy.
9. In fundamental analysis, the future price of the security is decided upon
the past and present performance and profitability of the company. As
opposed, in technical analysis the future prices are on the basis of charts
and indicators.
10.Fundamental analysis is done by long term position trader, while
technical analysis is done by swing trader and short term day trader.

Conclusion

In fundamental analysis, the stock is bought by the investor when the market
price of the stock is less than the intrinsic value of the stock. As against, in
technical analysis, the stock is bought by the traders, when they expect that it
can be sold at a relatively higher price.

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