Every stock market analyst has a divided approach to forecasting market trends and determining the growth of companies. Technical and fundamental analysis are the two sides of the same coin. Sometimes, they use both of these techniques in predicting stock prices, however.
New investors find it hard to determine the best stock for investment, so they have to go with either of the two techniques. Stick till the end for a detailed exploration!
If you want to find your ideal forecasting method, this is the blog.
What is fundamental analysis?
Fundamental analysts determine the stock based on intrinsic value. Fundamental analysis deals with numbers based on company analysis and economic conditions. They’re based on the following research-
- Financials of the company
- Generation of cash-flow
- Future growth potential
- Earnings visibility of business
Fundamental analysis focuses mainly on qualitative and quantitative methods, economic conditions, and industry trends. They carefully examine a company’s potential by considering earnings, liabilities, and expenses.
What is technical analysis?
Unlike fundamental analysis, technical analysts focus on statistical trends. This approach is all about charts, previous data, price, and volume. They’re solely based on chart analysis to identify patterns for future prices. It means that technical analysis is a data-driven approach that takes previous data of trends into account and then lays an estimate about a company.
They don’t measure a company’s intrinsic value. They instead predict the growth based on repetitive cycles of market trends of any particular stock.
What are the critical differences between technical analysis and fundamental analysis?
Fundamental analysts and technical analysts have a hot topic of debate on each other’s functionality. Fundamental analysts consider both past and present data to predict the upcoming trend. On the other hand, technical analysts scrap the idea of considering intrinsic value. They firmly believe in stock charts and the repetition of patterns.
Therefore, traders or short-term investors go for technical analysis, whereas long-term investors take a fundamental approach. Long-term investors believe that the market is never consistent, trends are bound to change, and they don’t go with assumptions.
Fundamental analysis is based on analyzing a stock’s financial position and performance with the help of a company’s financial statements. As discussed earlier, fundamental analysts decipher a stock’s market value by looking at its income statement, balance sheet, and cash flow account. They measure a company’s intrinsic value like metrics and performance and growth ratios.
They calculate the data and find a final stock price. A stock is considered a good investment if this stock price is below the intrinsic value and vice versa. Industry data and economic factors like retail spending and interest rate are used to find a final value for forecasting.
On the other hand, technical analysis forecasts a stock price considering chart-based data. Technical analysts hint at a company’s price chart, patterns, moving averages, and oscillators. Some take a tough road and calculate the pattern from complex analysis and market profiles. Therefore, traders mostly prefer technical analysis for instant profits and short-term trades.
Fundamental analysts are long-term players because they believe in the stock’s potential for the long run. They invest in a particular security for a definite time, like years and sometimes a quarter. These are value-based investors who wait for the intrinsic values of the company.
Technical analysts, however, don’t wait for a more extended time. Technical analysis is a quick process because there are no severe calculations like the fundamental method and is purely based on assumptions from the previous trends. Technical analysts don’t invest for more than a week or a month.
Let us explain with an easy example- say that an investor has invested in a stock that is growing slowly. Instead of redeeming his profit, he is waiting for a particular period because he has fundamentally calculated its future growth and trusts the company’s potential. This approach is a fundamental methodology of the stock.
Use of fundamental analysis and technical analysis together
As the debate increased, investors realized that fundamental and technical analysis have the potential of coexisting during research. When an investor sits down to forecast a company’s market growth, he will first calculate the possibility of an undervalued company from a fundamental approach and then find a particular point of redeeming the stock price.
However, it would be best to be extremely careful while using them together. Otherwise, this technique is very effective and is used by most expert-level traders. New investors should grab hold of one method and go with it before blending them together.
Effect of external news
External news lays a massive impact on technical analysis. There is stock at a downfall in the market because of certain economic conditions of countries and various other factors. The negative remarks will affect technical analysis forecasting based on previous trends.
Fundamental analysis is not affected by a stock’s negative remark in the media. Since it is a long-term investment approach, the external news doesn’t affect its growth potential in the market.
Which is better?
Does it just depend on what kind of investment you want? Different traders have varying choices. Some may prefer fundamental analysis, and others would find technical analysis easier. Critics believe that fundamental analysis is better than short-term technical analysis trading because it has a chance of long-term profit.
However, some critics also prefer technical analysis because an investor can determine the short-term trading prices themselves.
Fundamental analysis is preferred by long-term investors who purchase an undermined stock and wait for months till its value lowers than the intrinsic value. On the contrary, technical analysis focuses on buying a stock for significantly less time as they quickly sell them at a higher price.
Fundamental analysis is done from financial statements, economic conditions, and overall intrinsic value calculation. The technical analysis predicts the future price by a stock’s pattern on a graph or chart. You can use these methods simultaneously for effective trading, but you may also need to consider the risk.
Therefore, we hope you got your answer. Pick your ideal methodology and start investing!