Fundamental Analysis and Technical Analysis are not the methods that are restricted to investing in shares used by lots of different types of traders as well like foreign exchange traders, Bond traders, currency traders, commodity traders they all use fundamental analysis or technical analysis or maybe the combination of the two in different ways but primarily equity traders use these analyses while investing or in intraday trading.
These analyses are help full to investors to know the volatility of the particular financial instrument. As we mentioned above these analyses are used in all kinds of risk involved investments. Like commodities, currencies, bonds, mutual funds, equities. Many portfolio managers, analysts, speculators, credit agencies, banks, and many more investors rely on fundamental analysis and technical analysis.
Table of Contents
- 1 Introduction
- 2 What is Fundamental Analysis?
- 3 What is Technical Analysis?
- 4 Fundamental Analysis & Technical Analysis Comparison Table
- 5 Key Differences Between Fundamental Analysis & Technical Analysis
- 6 Similarities Between Fundamental Analysis & Technical Analysis
- 7 Conclusion
- 8 References
What is Fundamental Analysis?
Fundamental Analysis takes the view of its economic forces that drives prices considering the overall state of the economy. The economic factors which influence interest rates, production, earnings, employment, GDP, household, manufacturing, and management.
This fundamental analysis can be made with the available information to gauge a share value taking time to evaluate all the information that is out there affecting the company economically and this can become in the form of quantitative and qualitative information.
Quantitative information is nothing but the numerical data that is disclosed by the company or any sources whereas qualitative information is nothing but the information that can’t be measured numerically like intangibles which means goodwill or the essence of the company’s character.
- Brand Value/ Recognition
- Book Value
And we can compare these pieces of information to price with what we call valuation ratios like P/E ratio (price to earnings ratio), price to sales, and price to book value. Now for both quantitative and qualitative information together help us learn more about the financial health of the company and its prospects.
Financial analysis plays a huge role in financial markets. In 20th century speculation was a widespread approach to stock investing. Many investors used to invest in companies based on rumors or stock tips without considering the company’s financial state.
Later on investors spend their time analyzing the financial state of the potential investments. Today fundamental analysis is a standard approach to managing a portfolio. In fact, some of the most successful investment managers credited to this approach of analysis.
What is Technical Analysis?
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
Technical analysis can be used on any security with historical trading data. This includes stocks, futures, commodities, fixed-income, currencies, and other securities. In this tutorial, we’ll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is far more prevalent in commodities and Forex markets where traders focus on short-term price movements.
Technical analysis says all these things that fundamental analysis is worried about. Like dividends and earnings and who’s running the company. We will be assuming that all these factors have already reflected in prices we are looking at what price has been doing. Technical analysis assumes it’s all in the price so technical analysis purist might say that effectively everything they need to know is in the charts and at the basic level just a chart by itself does offer a visual summary of the stock and looking at the historical price data can be a guide the future idea that what has happened before might tell us a little bit about what is yet to come. The technical analysis combines both volumes as well as the trend prices of the share.
Types of Technical analysis
- Price action
Price action is a reaction to what price is saying on a 4x term so it can number of different aspects it can be candlesticks it could be breakouts it could be trend lines. Overall price action is a reaction to certain repeatable aspects that are happening on the chart.
- Technical indicators
- Moving averages
- Volatility measures.
Technical Indicators are the mathematical calculations using chronological price data, volume or open interest information which forecast market directions. Like oscillators, moving averages and etc.
Things mentioned above help in finding how much price has been moving. All these can be analyzed b looking into the charts.
Fundamental Analysis & Technical Analysis Comparison Table
|Particulars||Fundamental Analysis||Technical Analysis|
|Duration||Reflects fundamentals in the long run.||Reflects prices in the short run.|
|Timing||Tells nothing when it is going to reflect.||Tells you the timing of price volatility.|
|Information/Data||Data might be rumors or misguiding.||Data available through the charts are accurate enough.|
|Time||Time consuming activity||Consumes less time|
|Sentiments||Rely on sentiments of investors||No sentiments of investors are considered.|
|Value of Share||Determines the intrinsic value of the financial asset.||Beliefs there is no real value to a financial asset.|
|Tools||Financial statements are the tools||Historic patterns are used as tools|
|Decision||Makes decisions based on the information and stats evaluated.||Makes decisions based on the market conditions|
|Recommended||Recommended to long term investors.||Recommended to short term investors.|
Key Differences Between Fundamental Analysis & Technical Analysis
The difference between Fundamental Analysis and Technical Analysis are discussed below:
- The basic function of fundamental analysis is investing and technical analysis in trading.
- The required data is extracted from financial statements, various reports, and news in the fundamental analysis but technical analysis charts are the only source of required data.
- Factors of fundamental analysis consider economic factors and in the technical analysis, the only speculation is considered.
Similarities Between Fundamental Analysis & Technical Analysis
Fundamental analysis and technical analysis have some far distance between them but they are similar only in their goal which is evaluating the financial instrument’s future expectations.
- Both analyses are just assumptions or expectations or predictions.
- Both may fail at giving accurate expectations or predictions.
So it is one method better than the other and doesn’t have to be an either-or situation. A lot of investors and traders do tend to use a combination of both even if they lean heavily in favor of one over the other. Though when someone is in favor of technical analysis, they do not simply ignore if the CEO of the company left or earnings of the company are extremely low. Looking in the other way someone who is in favor of fundamental analysis they still going to cast their eye on charts just to get a feel for what the company’s price has been doing. Long term investors are more likely to lean on the fundamental analysis whereas, short term investors or intraday traders or speculators are more likely to lean on technical analysis. But using a combination of both the tools to invest is considered as a good move of an investor. Technical analysis users are usually a day to day traders who makes money only through capital gains and fundamental analysis users are the investors who make money through capital gain in the long term and dividends, bonus as well (benefits from the corporate action activities).