Difference Between Fundamental Analysis And Technical Analysis
Investment in the stock market requires analysis. If one can’t read the situation of the stock market, then in no amount of time, investment turns to disaster. There are two techniques that the investors and traders all over the world use to make stock related decisions – Fundamental Analysis and Technical Analysis. The stock tips given by the experts across the globe depend upon any of these two schools of thought.
What is Fundamental Analysis?
Fundamental analysis focuses on analyzing the fundamentals of the company to understand the enterprise value and forecast the share performance of the company. This aims to evaluate the actual value of a stock depending on the economic factors of the company as well as the country. These factors help determine the actual price. So if you are opting Fundamental Analysis then take the following analysis into account:
• Economic Analysis
• Industry Analysis
• Company Analysis
Assumptions of Fundamental Analysis:
1. It is assumed that the price of a stock corrects itself eventually in the long run.
2. When one purchases an under-valued stock and waits until the market corrects itself, a profitable return can be earned.
Thus, the stock tips provided on the basis of fundamental analysis are not intraday tips but the long-term investments.
What is Technical Analysis?
Technical analysis focuses on the past and historic performances of a stock to predict its future behavior. Investors or traders need to study the price pattern as well as the volume pattern of the stock. The main aim of Technical Analysis is to draw assumptions about the nature of the price pattern whether it will go up or low. Depending on these inferences, one can make decisions about buying or selling the stock.
Assumptions of Technical Analysis:
1. The market discounts everything.
2. Technical Analysis believes in “History repeats itself”.
3. Price moves in trends.
Unlike fundamental analysis, the stock tips provided by the gurus advocating this school of thought are usually intraday tips or short-term investments.
The fundamental analysis is used to predict share prices on the basis of statistical analysis of economy, company, and industry. The Earnings, dividend rate, and the retained earnings ratio play an important role in making these stock decisions.
On the other hand, Technical Analysis focuses on internal market trends and past statistics.
2. Share Value:
In fundamental analysis, the intrinsic value of a stock is estimated and stocks are bought when the market price is less than the intrinsic value. When the market price is more than the intrinsic value then stocks are sold which can take from a few months to a few years.
In Technical analysis, there is no concept of the real value of a stock. It depends on the demand and supply trend of the market which is directed by rational and irrational factors.
3. Long-Term & Short-Term Price Movement:
It is better to use Fundamental analysis while investing for the long term. Long term investors or Fundamentalists, often buy stock with large dividend payouts. They hold onto their stocks through fluctuations in the market for several years before selling them.
One can only forecast short term price changes in Technical analysis. The investors who invest in the short term are known as Technicians. They do not believe in keeping the stocks for long and sell as soon as they saw their short term profit which is calculated based on the lesser buying price and the dividend paid.
4. Identifying the Trend:
Fundamentalists do not believe in finding past trends and fluctuations. On the other hand, Technicians religiously follow past trends and believe in reoccurrences. Trends are the basis of drawing conclusions on price movements in technical analysis charts. Prices and patterns of stocks are examined carefully through statistics using multiple indicators like Fibonacci levels, odd lots, moving averages, and pull or call ratios.
5. Decision Making:
Financial statements, management quality, forecasts, and earnings and growth trends are analyzed in fundamental analysis. They use the available information and make pricing assumptions.
The market’s opinion plays a crucial role in forecasting stock prices. Technical analysts follow market trends and make informed investment decisions.
As the intrinsic value and market value are compared in Fundamental analysis, it is very useful in recognizing the undervalued or overpriced stocks. This intrinsic value (real value) is tabulated after considering all business aspects.
In Technical analysis, a purchase or sell order can be timed perfectly according to the fluctuations.
Thus, for intraday tips, one should go for the stock tips provided by experts that follow technical analysis and for the long-term investments veterans who advocate fundamental analysis should be looked up to.