Any kind of investment comes with some risks. However, when good strategies are implemented, the chances of success are much higher. Fundamental and technical analysis are essential tools for investors and traders looking to buy stocks. The techniques are very different and serve various purposes. Let’s look at each form of analysis more closely.
It is an evaluation of the intrinsic value of stocks. A fundamental analyst will analyse any data affecting the market in any way. This data will include the national economy, condition of the industry and the state of respective companies in terms of finances and management. Assets, expenses and liabilities are some of the company data that is evaluated. All this data collection and analysis is to show whether a stock is overpriced or undervalued.
It focuses on the movements of prices in the market. Uses past charts and studies historical trends to predict price movements. Technical analysts use this method of analysis to identify opportunities in the market. The main data analysed are stock prices and volume. Rather than focusing on a stock’s intrinsic value, technical analysis focuses on patterns suggesting future price movements.
Differences Between Fundamental Analysis And Technical Analysis
- Purpose and Goal
The two forms of analysis were created for different reasons and with different expectations in mind.
A technical analyst focuses on trading short term or medium term. They focus mainly on flipping stocks.
Fundamental analysts on the other hand focus on long term investments. Their goal is to capitalise on a stock’s primary market.
One of the reasons for this difference is that fundamental analysis uses data that is generated slowly over time. This means that it takes time to analyse. The investment takes time to bring in a profit-making a long term investment a better choice. Technical analysis uses data that is generated quickly and therefore does not require as much time to analyse as fundamentals.
- Tools Of Analysis
Fundamental analysis focuses on the intrinsic value of a stock. This means that the data collected by fundamental analysts will be about value measurement. Data such as balance sheets, cash flow or financial statements are examples of data collected. When stocks are traded at a lower price than their intrinsic value it is considered to be a good investment opportunity.
Technical analysis focuses on shifts in price movements. The main data collected reflects the prices and volume changes in the market. Rather than going through large amounts of data technical analysts analyse charts. They believe that all the necessary information is on the charts.
- Data Analysis
A fundamental analyst uses both current data and historic data. Analysts use this data to determine the performance of companies over some time. This enables them to determine the profitability of the underlying stocks.
A technical analyst only uses past data. This data is mostly in the form of charts and various indicators. Through this data, technical traders know when to enter and exit a market. They can also predict the movements of prices.
- Long-term or Short term
The two forms of analysis attract different types of investors.
Some seek to invest in the long term. Fundamental analysis is suitable for analysts who are seeking to invest. Options such as position trading are suitable for this type of investor.
Other traders prefer a short term investment. Technical analysis is suitable for traders. They may opt to swing trader or even to day trade in the short term.
In fundamental analysis, there are no assumptions made. All conclusions are based entirely on the data collected and analysed. Technical analysis however is based on several assumptions. One of the assumptions made is that past trends will affect price movements in the future.
- Factors Determining Buying Of Stock
For fundamental analysis, the main aim is to buy stocks when prices are low. A good deal is when the price is lower than the intrinsic value of the stock.
Technical analysis is about investing in stocks that can be sold at a higher price. Since the focus is price movements, a technical trader is concerned mostly with upward movements
Technical and fundamental analysis are unique strategies to apply when investing or trading. Traders choose either based on their goals and whether they intend to trade or invest.
In some cases, analysts may use a combination of the two techniques to get better results.