Stock traders are always driven by one of the two ideas: the why or how of price movements. Fundamental analysis and technical analysis are two concepts that show the inherent characteristics of price movements.
The objective of fundamental analysis is to identify the value of a stock by studying its financials & invest in stocks. The aim of technical analysis is price discovery, which entails determining prices based on various patterns and the development of stock prices during market sessions.
Fundamental vs. technical analysis of shares
Fundamental analysis is done using the financial books of a company and studying the overall variables of the company with the aim of arriving at a fair value for the stock’s price. Different analysts assign different weights to various factors affecting its economic state. This study analyses profitability, sector performance, and financial health through the quality of assets and liabilities of the company.
Conversely, the goal of technical analysis is to determine the stock’s price based on the demand and supply factors of the stock in question. Price movement forms several patterns that an analyst examines; these patterns indicate the stock’s strength and directionality. Technical analysts are adamant that every material factor influencing the company’s fundamentals is reflected in the stock price’s behaviour. Technical analysis is a combination of statistical ideas and historically recurring patterns.
Fundamental and technical analysis difference:
- Fundamental analysis aims at identifying the fair value of the stock, whereas technical analysis is done to identify price patterns and directionality.
- Fundamental analysis analyses the overall fundamentals of a company and economy. Technical analysis is based on the chart price and patterns visible on the stock’s price charts.
- Fundamental analysis aims at identifying fair stock price and is generally for long-term investment, whereas technical analysis aims at trading activity to be done in different terms through identification of price swings.
- Fundamental analysis uses different financial ratios to arrive at the desired result, such as Price-to-Earnings (P/E) ratio, liquidity ratio, etc. In contrast, technical analysis is built around different price patterns and statistical concepts, such as the head and shoulders pattern, moving averages, etc.
- Data for comprehensive fundamental analysis is to be gathered from a company’s financials, business journals, annual general meetings, etc., whereas for technical analysis, most of the data is available on the price charts themselves.
- Fundamental analysis is generally not affected by the day-to-day economic data releases and events whereas technical analysis gets affected by various data events happening every day.
- Traders with a long-term perspective of investments are more inclined towards fundamental analysis, whereas short-term or day traders base their trade decision on technical analysis indications.
Fundamental analysis and technical analysis have both proven to be critical for many market participants. Essentially, it is how you perceive the collection of data in front of you; both instruments may be a solid investment initiation and investment management tool.
These concepts have their own settings and appear to be diametrically opposed. However, many users have utilised both for various decisions equally effectively. A seasoned trader on a prop desk or hedge fund receives both fundamental and technical research information daily, which they apply based on discretion and market conditions to invest in stocks.