Fundamental analysis is good for long-term investors as it not only considers the present financials but also the likely change in its earnings profile. Technical analysis is good only for short-term traders, as it only looks at historical trends and ignores changes in fundamentals at the company end.
Are you looking to buy stocks but unsure of where to start with?
The best way to start would be via fundamental and technical analysis chart reading.
If you are unsure what the above terms are, consider this example: In a shopping mall, you see customers with varying shopping behavior, but everyone wants the best deal. Some would prefer brands while others would go in for trends. There could also be a few others, who would want trend and brand to go hand in hand.
Similarly, as a stock investor, you have different ways to ‘shop’ stocks with an ultimate goal to make profits. You may go for fundamental and technical analysis or even make a comparison for fundamental analysis vs technical analysis, to decide which stocks to buy.
Let’s look into the details:
Content:
- Fundamental Analysis
- Technical Analysis
- Fundamental Analysis vs Technical Analysis
- Fundamental or Technical Analysis Which is Better
- Quick Summary
Fundamental Analysis
Fundamental analysis deals with evaluating the potential/intrinsic value of a company/stock is. If a company is valued below its intrinsic value, it signals a buying opportunity.
Fundamental analysis not only considers the company’s historical earnings, debt and working capital requirements, and past corporate actions, but also the company’s competition, strengths and weaknesses, industry prospects, and macro factors that could influence the intrinsic value of its shares.
A company may be fundamentally strong, but underpriced in the stock market. On the other hand, a certain company might not be as fundamentally strong as others, but overpriced in the stock market.
A simple way of how fundamental analysis can be used in evaluating a stock is through a popular valuation ratio price-to-earnings (PE).
A PE ratio is defined by the price one pays for ₹1 earnings of a company. If the PE is 21, it means an investor is willing to pay ₹21 for every single rupee earnings by a company.
The formula for PE Ratio is Price/Earnings Per Share(EPS).
The denominator EPS is generally taken as the last four quarters of earnings (trailing 12 months). But it is not restricted to a trailing period.
PE can help investors compare companies in similar sectors and also with their own historical levels.
Investors can also look at the company’s debt levels, promoter pledging, interest outgo, sales, profit, and margin growth to check whether a company deserves the same valuations or not.
The idea is simple: Find the mismatch between the company’s actual worth and the market value, and gain from it.
Read more about PE ratio in our blog.
Technical Analysis
Technical analysts believe that past price movement patterns can help predict future price movements. The analysis is done by examining the historical price charts of the stock. Technical analysis is based on candlestick patterns, and technical indicators such as moving averages, Fibonacci Retracements, and Fibonacci Extensions.
Read More: What is Technical Analysis?
Fundamental Analysis vs Technical Analysis
The difference between fundamental analysis and technical analysis can be found below:
- Fundamental analysis is good for long-term investors as it not only considers the present financials but also the likely change in its earnings profile. Technical analysis is good only for short-term traders, as it only looks at historical trends and ignores changes in fundamentals at the company end.
- Also, technical analysis deals in the stock’s supply and demand dynamics and is not concerned with the company’s financials at all. It looks at patterns in the price chart of the company for bullish and bearish trends to give the traders ‘buy’ or ‘sell’ signals.
- On the other hand, fundamental analysis tries to identify an abnormality in the stock’s market value and its potential value.
- Technical analysis assumes that historical patterns repeat themselves over time but fundamental analysis believes that looking at past financial statements would be “looking into the rear mirror” and thus also focuses on future growth prospects.
- For technical analysis, only price charts and market volumes are required. Financial analysis requires financial statements, news reports, and brokerage estimates.
Fundamental Or Technical Analysis Which Is Better?
Both fundamental and technical analysis are better.
British Economist John Maynard Keynes once said that “the markets can remain irrational longer than you can remain solvent.” A stock might have a huge mismatch between its market value and intrinsic/potential value but the term ‘intrinsic’ is a ‘subjective’ issue.
In American investor Philip Fisher’s terms, “the stock market is filled with individuals who know the price of everything, but the value of nothing.”
For you, the stock may be cheap but for the seller of the stock, it would be expensive. That’s how a trade is executed. It needs a buyer and a seller.
So once an investor is confident that the market is not valuing the stock right on fundamentals, he must also check the technical trends whether the price action is strong enough for the scrip to move higher.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:
Quick Summary
- As a stock investor, you have different ways to ‘shop’ stocks with the ultimate goal to make profits. You may go for fundamental and technical analysis or even make a comparison between fundamental analysis and technical analysis, to decide which stocks to buy.
- Fundamental analysis deals with evaluating the potential/intrinsic value of a company/stock. If a company is valued below its intrinsic value, it signals a buying opportunity.
- Fundamental analysis not only considers the company’s historical earnings, debt and working capital requirements, and past corporate actions, but also the company’s competition, strengths and weaknesses, industry prospects, and macro factors that could influence the intrinsic value of its shares.
- In Technical analysis, past price movement patterns can help predict future price movements. The analysis is done by examining the historical price charts of the stock.
- Technical analysis is based on candlestick patterns, and technical indicators such as moving averages, Fibonacci Retracements, and Fibonacci Extensions.
