Technical Analysis VS Fundamental

Analysis
There are two schools of thought that take precedence for analyzing stock markets
– fundamental analysis and technical analysis. However, when it comes to the
process of determining the worth of an investment and/or trade the two types of
analyses are entirely conflictive in their approach.

Each of these methods comprises distinct qualities that appeal to specific market
players. Thus, understanding the difference between fundamental analysis and
technical analysis is critical to developing a comprehension of each and utilizing
them befittingly.

Fundamental Analysis

The primary distinction between fundamental and technical analysis is that the
former involves the process of understanding a stock’s intrinsic or inherent value
through the analysis of various factors. In this regard, analysts study elements that
can make an impact on the security’s integral value.

 Process

Fundamental analysis is an extensive process wherein every factor that has an

influence over the price of a security is minutely investigated to arrive at a
conclusion. In doing so it helps analysts to understand if a stock is priced correctly
with respect to the broader market.

Fundamental analysis takes into account both macro and microeconomic factors
that can influence the price of stocks to facilitate a comprehensive analysis. For
instance, to derive a conclusive result, analysts study broader components like the
country’s economic and industrial conditions, as well as, more particular elements
like a company’s management to determine the price of its stocks.

Furthermore, the method also makes use of several qualitative and quantitative
metrics to determine the well-being of the company in question. This is another
key difference between fundamental and technical analysis.
Some of the qualitative indicators that analysts popularly use to reach the intrinsic
value of a stock are –

1. Management competency
2. Intangible assets
3. Competitive edge
4. Business model
5. Corporate governance
6. Industry-wide growth
7. Customer base
8. Business cycles

A few of the quantitative indicators are –

1. Company’s annual revenue

2. Total profit
3. Tangible assets
4. Accounting ratios

Apart from these, a fundamental analyst must also be aware of the socio-
economic and political factors that might influence a stock’s value in the future.

 Inference

Now, if according to fundamental analysis, the intrinsic value of a stock is less

than its market price then that security is undervalued. Conversely, if per a
fundamental analysis the intrinsic value of a stock is more than its market price
then that security is overvalued.

Investors who rely on this determination will then buy a stock if it is undervalued
in the expectation to yield significantly higher returns in the long-run. Conversely,
market players will assume a short position on a stock when it is overvalued as its
prices will soon fall.
In short, fundamental analysis is an approach that is undertaken by investors and
works on the principle of “ buy and hold”. Investors who go by fundamental
analysis, base their decisions to buy a stock on a comprehensive understanding of a
company and hold their investments for a longer period.

 Shortcoming

However, misinterpreting any one aspect or overlooking a single fundamental

factor in this method of analysis may sometimes lead to an inaccurate
representation of intrinsic value.

Technical Analysis

While a fundamental analysis of security accounts for an array of factors, technical

analysis solely takes historical data directly related to the particular stock into
account. That is the primary difference between fundamental analysis and technical
analysis.

 Process

Technical analysts base their calculations on data that broadly involves the
historical prices of a stock, returns, and volume of trade. Through analysis of said
statistics, technical analysts attempt to project future price movements of a security
or market. Furthermore, such analysts base their results on the assumption that all
other fundamentals have already been factored into the stock’s price, and they
remain unchanged.

 Inference

Analysts of this school infer price ranges from a stock’s historical performance
patterns which function as a buying and selling signal, also known as support and
resistance respectively. That is another point of distinction in the debate of
fundamental analysis vs technical analysis.

Now, if the price of a security is moving toward the lower limit of the price-range
or support, then a trader shall swoop in to purchase the stock. Per technical
analysts, once the price reaches the lower limit, it will shoot up from thereon.
Conversely, if a security’s price is surging towards the upper limit of the price
range, then it signals a trader to sell the security in question because once it reaches
the ceiling, it will fall from thereon.

 Shortcoming

However, if the trend does not honour said price-range, then it might continue
rising upward or free-falling downward, resulting in substantial losses for
investors. Also, technical analysis requires experience as well as knowledge of
advanced concepts of stock markets. It is more suited for traders who are looking
for short term gains, rather than novice investors or individuals who want to invest
in a security based on its long term wealth creation. Investing in stock markets
based on technical analysis alone is riskier, therefore.

When to Use Fundamental Analysis and Technical Analysis?

Another critical point of fundamental analysis vs technical analysis is their usage

by market participants. Typically, the securities market comprises two types of
investors – long-term investors and short-term traders.

 Long-term investment

Long-term investment by virtue requires a more profound analytical approach

compared to short-term trading. Therefore, the former category of investors
typically resorts to fundamental analysis. That way, investors educate themselves
which stock would yield maximum returns in the long-run based on their intrinsic
values.

Investors can also use technical analysis for long-term investment by coupling it
with its fundamental counterpart to reach a more concrete conclusion.

 Short-term trading

Investors predominantly use technical analysis to determine short-term earning

potential of security. Since future projections reached via technical analysis is
based on short-term historical data, it cannot be a basis for long-term decisions.
 However, unusual events pertinent to factors that determine a stock’s true value
might also cause a dramatic price change in the short-run. Therefore, investors
might benefit from fundamental analysis in short-term trading; nonetheless, such
cases are rare.

Difference between Fundamental and Technical Analysis

The following table illustrates the key points of difference between fundamental
analysis and technical analysis.

Parameters Technical analysis Fundamental analysis

Purpose Determining security or market’s Understanding a security’s

prospective patterns by analysing fundamentals via its financial
historical price movements and performance, management, and
volumes of trade. overall market conditions.

Usage Investors typically use it for short- Market participants predominantly

term trading. utilise it for long-term investment.

Buy and sell Support and resistance, moving Overvalued and undervalued stocks.
signal averages, trend lines, and
momentum-based indicators.

Irrespective of the few points of fundamental analysis vs technical analysis, it is

most fruitful for investors to use both for developing a more comprehensive idea.