Difference Between Fundamental and Technical Analysis
Key Highlights:
Fundamental analysis involves analysing a company’s fundamentals Technical analysis entails analysis of technical charts and tools to find out a stock’s future price movement While fundamental analysis considers present and past data, technical analysis considers only historical data Fundamental analysis factors in various macroeconomic factors, while technical analysis involves volume trend analysis
As an investor, it's essential to thoroughly analyse stocks before investing. Prudent analysis helps you make the right choice, which goes a long way toward wealth creation. Fundamental and technical analysis are two methods of analysing stocks.
What is fundamental analysis?
Fundamental analysis entails analysing a company's key fundamentals, such as assets, liabilities, revenues, management quality, etc. It helps you determine a stock's intrinsic value by understanding its growth and future earning potential. Fundamental analysis lets you determine if a stock is overvalued or undervalued. Here's how it works:
Identifying the company's business model Analysing the firm's key financial statements like balance sheet, cash flow statement, income statement, etc. Evaluating the company's management and its position with respect to competitors Calculating the company's intrinsic value through price-to-earnings (P/E) ratio, discounted cash flow analysis (DCF), etc.
What is technical analysis?
Technical analysis involves analysing technical charts and tools to determine a stock's future price movement. You can find out potential entry and exit points through technical analysis. Here's how it works:
- Plotting historical data to create chart patterns
- Identifying different chart patterns
- Using technical indicators to gain insights into price movements
- Implementing volume analysis to confirm the validity of price movements
Fundamental vs technical analysis: The differences
The table captures the key differences between fundamental and technical analysis across various parameters:
Primary objective
The primary objective is to gauge if a stock is overvalued or undervalued.
The main aim is to use various tools and charts to find out a stock’s future price movements.
Investment time frame
It’s typically used with a long-term investment horizon.
It’s typically used with a short-term investment horizon to find out short-term price movement.
Tools and techniques used
Incorporates various metrics like financial ratios, discounted cash flows, etc.
Incorporates various chart patterns and technical indicators such as moving averages, etc.
| Parameter | Fundamental analysis | Technical analysis |
|---|---|---|
Primary objective | The primary objective is to gauge if a stock is overvalued or undervalued. | The main aim is to use various tools and charts to find out a stock’s future price movements. |
Investment time frame | It’s typically used with a long-term investment horizon. | It’s typically used with a short-term investment horizon to find out short-term price movement. |
Considerations | Takes into account present and past data for analysis. | Considers only historical data. |
Tools and techniques used | Incorporates various metrics like financial ratios, discounted cash flows, etc. | Incorporates various chart patterns and technical indicators such as moving averages, etc. |
Factors taken into account | Considers various macroeconomic factors (inflation, GDP, etc.) industry benchmark, and company’s performance, among others. | Factors in transactional volume, trend analysis, moving averages, etc. |
Fundamental and technical analysis - What should you choose?
Fundamental and technical analysis both have their respective benefits and drawbacks. While the former helps you identify stocks that could be multi-baggers in the future, the latter helps you gauge a stock's future price movement and the right time to buy or sell a stock. Through fundamental analysis, you can find out about companies with high growth potential while technical analysis tells you when you should invest in them.
In conclusion
Both fundamental and technical analysis are essential in their own way in stock investment. Combine both to achieve the best results and get going. Happy investing!
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI prescribed Combined Risk Disclosure Document prior to investing. Brokerage will not exceed SEBI prescribed limit.
FAQs about difference between fundamental and technical analysis
How to do fundamental and technical analysis of stocks?
Fundamental analysis involves analysing a company's fundamentals while technical analysis involves examining technical indicators like oscillators, overlays, and moving average convergence/divergence.
How accurate is technical analysis?
Technical analysis differs across different technical indicators. To achieve optimum results, complement one indicator with another.
