Technical analysis and fundamental analysis are two main schools of thought when it comes to analyzing the financial markets.
Technical analysis looks at the price movement of a security and uses this data to attempt to predict future price movements. Fundamental analysis instead looks at economic and financial factors that influence a business.
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The Differences
Tools of the Trade
Typically, technical analysts begin their analysis with charts, while fundamental analysts start with a company’s financial statements.
Fundamental analysts try to determine a company’s value by looking at its income statement, balance sheet and cash flow statement. In financial terms, an investor tries to measure a company’s intrinsic value by discounting the value of future projected cash flows to a net present value. A stock price that trades below a company’s intrinsic value is typically considered a good investment opportunity and vice versa.
Technical analysts generally believe that there’s no reason to analyze a company’s financial statements since the stock price already includes all relevant information. Instead, the investor focuses on analyzing the stock chart itself for hints about where the price may be headed.
Typically, technical analysts begin their analysis with charts, while fundamental analysts start with a company’s financial statements.
Fundamental analysts try to determine a company’s value by looking at its income statement, balance sheet and cash flow statement. In financial terms, an investor tries to measure a company’s intrinsic value by discounting the value of future projected cash flows to a net present value. A stock price that trades below a company’s intrinsic value is typically considered a good investment opportunity and vice versa.
Technical analysts generally believe that there’s no reason to analyze a company’s financial statements since the stock price already includes all relevant information. Instead, the investor focuses on analyzing the stock chart itself for hints about where the price may be headed.
Time Horizon
Generally, fundamental analysis takes a long-term approach to investing compared to the short term approach taken by technical analysis. While stock charts can be shown in weeks, days or even minutes, fundamental analysis often looks at data over multiple quarters or years.
Fundamentally focused investors often wait a long time before a company’s intrinsic value is reflected in the market, if at all. For example, value investors often assume that the market is mispricing a security over the short-term, but also assume that the price of the stock will correct itself over the long run. This “long run” can represent a timeframe as long as several years, in some cases.
Fundamentally focused investors also rely on financial statements that are filed quarterly, as well as changes in earnings per share that do not emerge on a daily basis, like price and volume information. After all, a company cannot implement sweeping changes overnight and it takes time to create new products, marketing campaigns and other strategies to turn around or improve a business. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts.
Generally, fundamental analysis takes a long-term approach to investing compared to the short term approach taken by technical analysis. While stock charts can be shown in weeks, days or even minutes, fundamental analysis often looks at data over multiple quarters or years.
Fundamentally focused investors often wait a long time before a company’s intrinsic value is reflected in the market, if at all. For example, value investors often assume that the market is mispricing a security over the short-term, but also assume that the price of the stock will correct itself over the long run. This “long run” can represent a timeframe as long as several years, in some cases.
Fundamentally focused investors also rely on financial statements that are filed quarterly, as well as changes in earnings per share that do not emerge on a daily basis, like price and volume information. After all, a company cannot implement sweeping changes overnight and it takes time to create new products, marketing campaigns and other strategies to turn around or improve a business. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts.
Trading vs. Investing
Technical analysis and fundamental analysis typically have different goals in mind. Technical analysts often try to identify many short- to medium-term trades where they can flip a stock, while fundamental analysts usually try to make long-term investments in a stock’s underlying business. A good way to conceptualize the difference is to compare it to someone buying a home to flip versus someone who’s buying a home to live in for years to come.
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Fundamental Analysis
The primary distinction between fundamental and technical analysis is that the former involves the process of understanding a stock’s intrinsic or inherent value through the analysis of various factors. In this regard, analysts study elements that can make an impact on the security’s integral value.
Process
Fundamental analysis is an extensive process wherein every factor that has an influence over the price of a security is minutely investigated to arrive at a conclusion. In doing so it helps analysts to understand if a stock is priced correctly with respect to the broader market.
Fundamental analysis takes into account both macro and microeconomic factors that can influence the price of stocks to facilitate a comprehensive analysis. For instance, to derive a conclusive result, analysts study broader components like the country’s economic and industrial conditions, as well as, more particular elements like a company’s management to determine the price of its stocks.
Furthermore, the method also makes use of several qualitative and quantitative metrics to determine the well-being of the company in question. This is another key difference between fundamental and technical analysis.
Some of the qualitative indicators that analysts popularly use to reach the intrinsic value of a stock are –
Management competency
Intangible assets
Competitive edge
Business model
Corporate governance
Industry-wide growth
Customer base
Business cycles
A few of the quantitative indicators are –
Company’s annual revenue
Total profit
Tangible assets
Accounting ratios
Apart from these, a fundamental analyst must also be aware of the socio-economic and political factors that might influence a stock’s value in the future.
Inference
Now, if according to fundamental analysis, the intrinsic value of a stock is less than its market price then that security is undervalued. Conversely, if per a fundamental analysis the intrinsic value of a stock is more than its market price then that security is overvalued.
Investors who rely on this determination will then buy a stock if it is undervalued in the expectation to yield significantly higher returns in the long-run. Conversely, market players will assume a short position on a stock when it is overvalued as its prices will soon fall.
In short, fundamental analysis is an approach that is undertaken by investors and works on the principle of “ buy and hold”. Investors who go by fundamental analysis, base their decisions to buy a stock on a comprehensive understanding of a company and hold their investments for a longer period.
Shortcoming
However, misinterpreting any one aspect or overlooking a single fundamental factor in this method of analysis may sometimes lead to an inaccurate representation of intrinsic value.
Technical analysis and fundamental analysis typically have different goals in mind. Technical analysts often try to identify many short- to medium-term trades where they can flip a stock, while fundamental analysts usually try to make long-term investments in a stock’s underlying business. A good way to conceptualize the difference is to compare it to someone buying a home to flip versus someone who’s buying a home to live in for years to come.
Can They Co-Exist?
Technical analysis and fundamental analysis are often seen as opposing approaches to analyzing securities, but some investors have experienced success by combining the two techniques. For example, an investor may use fundamental analysis to identify an undervalued stock and use technical analysis to find a specific entry and exit point for the position. Often, this combination may work best when a security is severely oversold and entering the position too early could prove costly.
Alternatively, some primarily technical traders will look at fundamentals to support their trade. For example, a trader may be eyeing a breakout near an earnings report and look at the fundamentals to get an idea of whether the stock is likely to beat earnings.
Technical analysis and fundamental analysis are often seen as opposing approaches to analyzing securities, but some investors have experienced success by combining the two techniques. For example, an investor may use fundamental analysis to identify an undervalued stock and use technical analysis to find a specific entry and exit point for the position. Often, this combination may work best when a security is severely oversold and entering the position too early could prove costly.
Alternatively, some primarily technical traders will look at fundamentals to support their trade. For example, a trader may be eyeing a breakout near an earnings report and look at the fundamentals to get an idea of whether the stock is likely to beat earnings.
Comparison Chart
| BASIS FOR COMPARISON | FUNDAMENTAL ANALYSIS | TECHNICAL ANALYSIS |
|---|---|---|
| Meaning | Fundamental Analysis is a practice of analyzing securities by determining the intrinsic value of the stock. | Technical analysis is a method of determining the future price of the stock using charts to identify the patterns and trends. |
| Relevant for | Long term investments | Short term investments |
| Function | Investing | Trading |
| Objective | To identify the intrinsic value of the stock. | To identify the right time to enter or exit the market. |
| Decision making | Decisions are based on the information available and statistic evaluated. | Decisions are based on market trends and prices of stock. |
| Focuses on | Both Past and Present data. | Past data only. |
| Form of data | Economic reports, news events and industry statistics. | Chart Analysis |
| Future prices | Predicted on the basis of past and present performance and profitability of the company. | Predicted on the basis of charts and indicators. |
| Type of trader | Long term position trader. | Swing trader and short term day trader. |
Fundamental Analysis
The primary distinction between fundamental and technical analysis is that the former involves the process of understanding a stock’s intrinsic or inherent value through the analysis of various factors. In this regard, analysts study elements that can make an impact on the security’s integral value.
Process
Fundamental analysis is an extensive process wherein every factor that has an influence over the price of a security is minutely investigated to arrive at a conclusion. In doing so it helps analysts to understand if a stock is priced correctly with respect to the broader market.
Fundamental analysis takes into account both macro and microeconomic factors that can influence the price of stocks to facilitate a comprehensive analysis. For instance, to derive a conclusive result, analysts study broader components like the country’s economic and industrial conditions, as well as, more particular elements like a company’s management to determine the price of its stocks.
Furthermore, the method also makes use of several qualitative and quantitative metrics to determine the well-being of the company in question. This is another key difference between fundamental and technical analysis.
Some of the qualitative indicators that analysts popularly use to reach the intrinsic value of a stock are –
Management competency
Intangible assets
Competitive edge
Business model
Corporate governance
Industry-wide growth
Customer base
Business cycles
A few of the quantitative indicators are –
Company’s annual revenue
Total profit
Tangible assets
Accounting ratios
Apart from these, a fundamental analyst must also be aware of the socio-economic and political factors that might influence a stock’s value in the future.
Inference
Now, if according to fundamental analysis, the intrinsic value of a stock is less than its market price then that security is undervalued. Conversely, if per a fundamental analysis the intrinsic value of a stock is more than its market price then that security is overvalued.
Investors who rely on this determination will then buy a stock if it is undervalued in the expectation to yield significantly higher returns in the long-run. Conversely, market players will assume a short position on a stock when it is overvalued as its prices will soon fall.
In short, fundamental analysis is an approach that is undertaken by investors and works on the principle of “ buy and hold”. Investors who go by fundamental analysis, base their decisions to buy a stock on a comprehensive understanding of a company and hold their investments for a longer period.
Shortcoming
However, misinterpreting any one aspect or overlooking a single fundamental factor in this method of analysis may sometimes lead to an inaccurate representation of intrinsic value.
Technical Analysis
While a fundamental analysis of security accounts for an array of factors, technical analysis solely takes historical data directly related to the particular stock into account. That is the primary difference between fundamental analysis and technical analysis.
Process
Technical analysts base their calculations on data that broadly involves the historical prices of a stock, returns, and volume of trade. Through analysis of said statistics, technical analysts attempt to project future price movements of a security or market. Furthermore, such analysts base their results on the assumption that all other fundamentals have already been factored into the stock’s price, and they remain unchanged.
In short, technical analysis is predominantly based on patterned price movements.
Inference
Analysts of this school infer price ranges from a stock’s historical performance patterns which function as a buying and selling signal, also known as support and resistance respectively. That is another point of distinction in the debate of fundamental analysis vs technical analysis.
Now, if the price of a security is moving toward the lower limit of the price-range or support, then a trader shall swoop in to purchase the stock. Per technical analysts, once the price reaches the lower limit, it will shoot up from thereon.
Conversely, if a security’s price is surging towards the upper limit of the price range, then it signals a trader to sell the security in question because once it reaches the ceiling, it will fall from thereon.
Shortcoming
However, if the trend does not honour said price-range, then it might continue rising upward or free-falling downward, resulting in substantial losses for investors. Also, technical analysis requires experience as well as knowledge of advanced concepts of stock markets. It is more suited for traders who are looking for short term gains, rather than novice investors or individuals who want to invest in a security based on its long term wealth creation. Investing in stock markets based on technical analysis alone is riskier, therefore.
While a fundamental analysis of security accounts for an array of factors, technical analysis solely takes historical data directly related to the particular stock into account. That is the primary difference between fundamental analysis and technical analysis.
Process
Technical analysts base their calculations on data that broadly involves the historical prices of a stock, returns, and volume of trade. Through analysis of said statistics, technical analysts attempt to project future price movements of a security or market. Furthermore, such analysts base their results on the assumption that all other fundamentals have already been factored into the stock’s price, and they remain unchanged.
In short, technical analysis is predominantly based on patterned price movements.
Inference
Analysts of this school infer price ranges from a stock’s historical performance patterns which function as a buying and selling signal, also known as support and resistance respectively. That is another point of distinction in the debate of fundamental analysis vs technical analysis.
Now, if the price of a security is moving toward the lower limit of the price-range or support, then a trader shall swoop in to purchase the stock. Per technical analysts, once the price reaches the lower limit, it will shoot up from thereon.
Conversely, if a security’s price is surging towards the upper limit of the price range, then it signals a trader to sell the security in question because once it reaches the ceiling, it will fall from thereon.
Shortcoming
However, if the trend does not honour said price-range, then it might continue rising upward or free-falling downward, resulting in substantial losses for investors. Also, technical analysis requires experience as well as knowledge of advanced concepts of stock markets. It is more suited for traders who are looking for short term gains, rather than novice investors or individuals who want to invest in a security based on its long term wealth creation. Investing in stock markets based on technical analysis alone is riskier, therefore.
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