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 being undervalued or overvalued.
Fundamental vs Technical Analysis
The main 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 values of the security. 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 the share prices.
Even though both types of analysis are used in the stock market, their purpose is entirely different, and these analyses have different variables that are taken into consideration.
Comparison Table Between Fundamental and Technical Analysis (in Tabular Form)
| Parameter of Comparison | Fundamental Analysis | Technical Analysis |
|---|---|---|
| Meaning | This type of analysis is done, taking into consideration the internal value of the stock. | This type of analysis is done while taking into consideration the future prices of stock, i.e., external value. |
| Purpose | Its purpose is to find the internal value of the stock. | Its purpose is to find the right time for entering/exiting the market. |
| Function | This type of analysis is used in investing. | This type of analysis is used for trading. |
| Focus | Takes into consideration data of 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 | In this type of analysis, decisions are made based on available information and evaluated statics. | In this type of analysis, decisions are made on the prices of stock and the trends of the market. |
What is Fundamental Analysis?
The fundamental analysis enables a trader to find out the fair value of the stock. This value, when compared to the market prices, allows the trader to figure out whether the stock is being 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 as it encompasses 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 usually on search for undervalued or overvalued stocks that are currently being traded. These are long-term position traders. This is because they do the analysis to invest for the long-term.
Fundamental analysis is of two types. First is the top-down analysis. In this type, the analysis 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 then moves his/her way up, including all the factors that might affect the prices of the stock.
Now, fundamental analysis is constructive in understanding the worth of an asset. But it has its drawbacks. It is a very length 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 stock. They try to understand the trends of the stock market by studying moving averages, indicators and 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 that focuses on both present and past. This analysis is used by swing traders or short term day traders, and the main output of the analysis 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 the 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 tough analysis and makes 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 purposes.
- The decision in the fundamental analysis is based on both past, and present data, whereas technical analysis decisions are only based on present data.
- Fundamental analysis is focused on estimating the current value of the stock (intrinsic value), whereas technical analysis is focused on estimating the entry and exit time in the market.
Conclusion
Fundamental analysis and technical analysis are both methods used in the stock market, but their purpose is different. Fundamental analysis tends to give long-term investors the worth of their stock. This includes all the factors that might affect the price of the security. It is of two types – bottom-up and top-down.
On the other hand, technical analysis is focused on helping the trades find the optimum times to enter and exit the stock market. This is more of short-term trading analysis.
Both analyses are equally essential to determine what to buy when to buy and when to sell.
References
- 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