Fundamental Analysis
Fundamental Analysis evaluates stocks by finding out their intrinsic value. Investors study all the factors that can affect the price of the company in the future.
They do this by looking at the overall economy, industry conditions, company profits, company management, and more. Earnings, assets, and liabilities are all important as well.
Fundamental analysis is geared towards long term investing. It takes past and present data into account, to predict the future growth of the company.
Determining the intrinsic value of the company allows investors to buy stocks when they are lower priced, and hold them for future growth.
It allows investors to determine if stocks are overpriced or undervalued. However, misinterpretation of a particular factor might skew your intrinsic value interpretation.
Technical Analysis
The technical analysis evaluates stocks by looking at charts, and past data. Technical analysis focuses on the historical prices of a stock, returns, and trade volumes.
- Here, they do not look at a stock’s intrinsic value, but look for price trends and try to predict the stock’s price in the future.
- Indicators are mainly used here, as compared to fundamental analysis.
- Technical analysis is not useful for long term trading but much better suited for short term trading. This is because looking at charts specifically helps predict short term price movements.
Key Differences
- Functions: Fundamental analysis is used for investments, while technical analysis is used for trading
- Duration: Fundamental analysis is relevant for long term investments, while technical analysis is used for short term trading
- Data: Fundamental analysis uses past and present data, to determine the intrinsic value. Technical analysis uses only past data to predict future price movements.
- Methodology: Fundamental analysis examines the industry, financial data, performance of the company, and performance of rivals. Technical analysis looks more on investor sentiment.
- Indicators: Fundamental analysis studies revenues, expenses, liabilities, assets, return on equity ratio, price to equity ratio, debt to equity ratio, etc. Technical analysis makes use of charts, like the RSI, MACD (Moving Average Convergence Divergence), Simple moving average, and other such indicators.
Even though these two types of analysis are different in nature, they are both useful for investors, and it is advised for investors to use both of these analyses in their decision-making process.
Take a look at this article as well
