Difference Between Fundamental Analysis and Technical Analysis

When it comes to investing in the stock market, there is no one size fits all approach that works, and different people invest or trade according to their understanding and needs. If you are someone who wants to earn good money in a short time by playing on the volatility of the stock market, then you can trade in the market.  

On the other hand, if your risk-taking appetite is low and you want to stay in the market for a longer duration then also the stock market will accommodate you. Both these methods require different approaches to stock analysis, which is important before picking any stock.  

While fundamental analysis is necessary for long-term investing, technical analysis is a critical weapon for traders. In this blog we will delve into the primary differences between fundamental and technical analysis and understand them in detail. 

 

 

Key differences between Fundamental and Technical Analysis 

Here is the list of some primary differences between fundamental and technical analysis: 

 

 

 

What is Fundamental Analysis? 

Fundamental analysis is the method of assessing the intrinsic value of a stock for investment purposes. It is done by examining various fundamental aspects of a company such as: 

1. Financial statements (Balance sheet, Profit & Loss Account, Cash Flow Statement) 
2. Prospects 
3. Sector and Industry Analysis (Scope of the sector or industry in future or peer analysis) 
4. Management Quality Check 
5. Financial ratios (Liquidity ratio, debt to equity ratio etc.) 

 

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Purpose of Fundamental Analysis 

The Fundamental Analysis method of analysis was rolled out by Benjamin Graham and David Dodd in 1934. It involves both quantitative and qualitative methods of assessment as while performing fundamental analysis one has to analyze measurable financial and economic data such as financial statements and ratio and metrics as well as qualitative aspects such as management quality check and government policies assessment.  

This method does not just concentrate on the profits and losses generated by the companies but also aims to make sense of the current stock prices of the companies with their actual value. 

 

Process of Fundamental Analysis 

Fundamental analysis follows a top-down analysis approach encompassing the economy as a whole along with the industry the company operates in and the company itself. The purpose of it is to assist the investors in making an informed decision.  

The fundamental analysis process consists of three main levels: economic analysis, industry analysis and company analysis.  Let’s discuss these processes in brief: 

 

i) Economic analysis: It is a macro-level analysis in which an investor is concerned with broader factors that affect the performance of a company such as GDP, inflation rates, interest rates and government policies. It is an important factor to consider as a robust economy facilitates business growth whereas a weaker one presents hindrances and results in slow or negative growth for a company.

 

ii) Industry Analysis: This sector analysis is concerned with the industry in which the company operates. An industry is an ecosystem of business or companies of the same nature working and it also plays a crucial role in the success of a company.  

A prudent investor ensures a proper industry analysis is performed that involves analyzing factors such as industry growth trends, market demand and consumer trends, competition analysis and regulatory environment. 

 

iii) Company Analysis: 

Next step in fundamental analysis is the thorough analysis of the financial statements of the company you wish to invest in. This step is performed to assess the financial state of the condition.  

Additionally, this process also involves other aspects of the company apart from their financials such as management assessment and the competitive advantages or disadvantages of the company. The process of fundamental analysis incudes: 

• Financial statement analysis (balance sheet, income statement, P&L account) 
• Financial ratio analysis (liquidity ratio, current ratio) 
• Qualitative factors (Management quality check, competition analysis) 

 

 

What is Technical Analysis? 

Technical analysis is the process of evaluating and predicting future price movements of stocks based on historical price data, chart movements and trading volume. Unlike fundamental analysis, this method of stock analysis works strictly on past patterns, data and algorithms which makes it suited for traders and investors who want to make profit in the short term. The main objective of this method is to study past data to identify optimal entry and exit points for buying and selling stocks. 

 

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Primary Tools for Technical Analysis 

The key tools on which traders and investors rely on while performing technical analysis are: 

 

Technical Charts 

Charts are an integral cog of technical analysis that assists traders in making sense of historic price movements, trends and patterns. Charts make it easier for traders and investors to identify trends, spot key price levels, analyze price patterns and confirm trade signals. Some of the commonly used charts in technical analysis are: 

• Line Chart 
• Bar Chart 
• Candlestick chart 

 

Trend Analysis 

Technical analysis is all about using past data to predict future price movements of stock and trend analysis helps you to do that successfully. There are mainly three types of trends in technical analysis known as: 

1. Uptrend (bullish trend) 
2. Downtrend (bearish trend) 
3. Sideways (consolidated) 

 

Support and Resistance levels 

Support and resistance levels in technical analysis help in spotting price points at which the market trend will either stall or reverse its direction.  

Support level: It is the price level on the charts where the buying pressure is more than the selling pressure resulting in the prevention of prices from falling further.   

Resistance level: It indicates the price level at which selling pressure overpowers the buying pressure leading to a halt in price appreciation. 

 

Technical Indicators 

Technical indicators are crucial tools in technical analysis, offering valuable insights into market trends and helping traders make informed decisions. Technical indicators play a critical role in technical analysis by providing valuable marketing insights which in turn assists traders and investors in making prudent decisions. These indicators help in identifying market trends, gauging momentum, confirming price action and finding entry and exit points. Some of the prominent technical indicators are: 

1. Moving Averages (MA) 
2. Relative Strength Index (RSI) 
3. Moving Average Convergence Divergence (MACD) 
4. Bollinger Bands 

 

 

Wrapping Up 

Investing requires knowledge and the right psychology for you to succeed. While psychology is something that you also develop with experience, knowledge comes with learning. It is always advisable to learn about fundamental and technical analysis before starting your investment journey to have the right skill set to succeed and earn decent returns in the stock market.