DIFFERENCE BETWEEN FUNDAMENTAL & TECHNICAL ANALYSIS

When it comes to investing in the stock market various tools and methods are used to study the behavior of the markets. These studies allow investors as well as market analysts to foresee the emerging trends in the market. Broadly we can classify stock market analysis into two categories – fundamental analysis or technical analysis. Most investors and analysts use either of the two or a combination of both to study the market. While there has always been a raging debate on which form or analysis is more beneficial to the investor. The fact is both these methods of analysis have their advantages and flaws. Here in this brief write-up we shall take a look into each of these.

Fundamental Stock Analysis

This stock analysis method calculates stock value using economic factors, known as fundamentals. In this method the analysts would closely examine the company’s products, management, competitors, and the economic environment. It is operating it to determine the value of the stock in the market. This process relies on using both the historical and present data to make predictions for the future. Common data such as revenue, operating expenses, assets, earning from shares, liabilities, book value, cash flow and dividends are used to determine the growth prospects of stocks. Analysts also take into consideration key ratios such as price/earnings ratio (P/E), dividend payout, return on equity and price to book value to name a few.

Technical Stock Analysis


Technical Stock Analysis practically relies on using price movement of the stocks historically to predict future price movements. According to the supporters of this analytical approach markets, tend to move in cycles and accurate predictions can be made studying the price patterns and price trends of the past.  Technical analysts take interest in the relative strength index, averages, regressions, inter-market and intra-market price correlations to predict the trends and prices of stocks. They also take into account things such as patterns in the chart and the cycles of business.

Difference In Approach


The fundamental difference between the two comes from the fact that while Fundamental Analysis relies on studying the intrinsic value of a stock. Technical Analysis on the other hand mainly focuses on studying prices and volumes. According to the Fundamental approach school stocks are bought when price falls below intrinsic value while traders relying on Technical Analysis. Buy stocks when they believe that the stocks can be sold for a higher price in the future.

While earnings, expanses, assets etc. are of great importance to people who adopt the Fundamental Analysis route they mean little to those studying the dynamics of the market using the Technical Analysis model. In short both these are on the opposite sides of the spectrum and share very little in common. Which approach is best suited for you? There is no definitive answer to this as traders and analysts have extensively written in favor of as well as against both. As a smart investor it would be wise for you to pick and choose both these approaches and use them based on your requirements.