What is Fundamental Analysis? What is Technical Analysis? How do these methods work? Well, before answering these questions let’s take a look at a practical situation. We keep on hearing that a company has “Strong Fundamentals” when we look at any stock market analyst. Another thing we hear is It is must buy stock, as the fundamentals of the company is strong. So what exactly are fundamentals, how and when they are analyzed? In this post, I will try to answer these questions.
Fundamental analysis and technical analysis are two principal methods for stock analysis used by stock market experts. Prima facie Fundamental analysis is done for the investment and technical analysis for trading. Both methods are separate.
Let’s try to figure out which one is a better method for stock analysis.
Fundamental Analysis (FA) or Technical Analysis (TA)
What is Fundamental Analysis?
Fundamental Analysis (FA) is a method to identify the fundamental (intrinsic value) of the stock. Fundamental analysis is done by collecting financial statements and doing research over data such as revenue, expense, growth prospects, etc.
The basic objective of the fundamental analysis is knowing everything about business before making an investment. Its emphasis is on the business and not on the market. For fundamental analysis, you need to analyze a lot of information like business model, product range, completion, historical performance, prospects, financials, management integrity, etc. An outcome of FA is the fair market value of the stock which helps investors in making the investment decision.
In nutshell, fundamental analysis is aimed at finding out the suitability, value, and financial status of the business for the investment.
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What is Technical Analysis?
Technical Analysis (TA) is a method to analyze the supply and demand of the stock. Technical analysis is done by collecting and analyzing data on people’s buying and selling, price variation, momentum, and patterns, plotting stock on the chart, and doing various statistical analyses.
The basic objective of the Technical analysis is forecasting future stock prices. For technical analysis, you need to analyze data, patterns, charts, and a lot of other things. An outcome of TA is to get information about the demand for the company’s stock.
In nutshell, technical analysis is aimed at finding out the demand of stock and market behavior for forecasting stock price for trading.
Example of Fundamental and Technical Analysis
To simplify the concept of FA and TA let’s take a look at one example. Let’s say you want to buy gold for investment and not for the usage. So, your objective is to gain from an increase in the gold price over a period of time. Now before making an investment decision, you need to do the analysis. Let’s try to apply Fundamental and Technical Analysis and see how it works.
Fundamental analysis, in this case, would be analyzing gold quality, structure, form, historical performance, prospects, purity of gold, etc. If you feel that investment in gold is worth at its current valuation you invest in the gold.
Technical analysis, in this case, will not focus on the gold and its attributes. It will focus on demand, trends, and momentum. Based on these factors future price is predicted and if it’s deemed appropriate you buy gold to sell to someone at a higher price on the rise in demand.
I hope from the above example you have got a clear idea about FA and TA. FA focuses on the asset and TA focuses on the market outlook and perception of the asset.
Difference between Fundamental Analysis and Technical Analysis
How to learn Fundamental Analysis and Technical Analysis?
There are two ways to learn these methods.
- Self-learning – In this method, you have to learn these techniques by yourself. You can read books or take the help of the internet and youtube to learn these techniques.
- Classroom training – In this method, you need to take classroom training for learning. Many experts teach these techniques. You need to spend money but it is a better learning method.
If you don’t want to learn FA or TA you can consult experts and invest or trade with the help of experts.
Which is better?
Well, it is very difficult to say FA is better or TA is better. Both have their advantages and disadvantages. The advantage of FA is it provides investment decisions based on the fundamentals of the company. However, it is generally used for long-term investment. You need to hold stocks for several years before it makes any gain. Similarly, the advantage of TA is it helps you to get an idea about when to enter and exit the stock. However, if you use only TA you may end up buying low-quality stock.
So, it is advisable to use both methods fundamental analysis and technical analysis.
Do you use fundamental analysis or technical analysis for stock market investment?
Do share your views in the comment section.