Fundamental Analysis vs. Technical Analysis: Which One Is Better

Have you ever thought about investing in stocks or any kind of assets? If yes, then you must read this article to know whether the fundamental analysis is better or technical analysis before making your final decision for investment.

Fundamental analysis and technical analysis are the two most important factors that help investors to make any important investment decisions. This helps them to decide whether to buy an asset, hold it, or sell it. Traders & investors perform both fundamental and technical analysis to anticipate the future value of a stock.

What Is Fundamental Analysis

Fundamental analysis is done to evaluate any stock by measuring its intrinsic value. Fundamental analysts research everything including the condition of the global economy, market trends, industry conditions, management of the organization, the financial health of the specific business, etc.

Apart from that, other factors which are also considered by them are expenses, earnings, assets, and liabilities. To determine a stock’s intrinsic value, the company’s financial statements and macro & micro factors are also considered.

What is Technical Analysis

Technical analysis is performed by understanding statistical trends like the pattern of stock price, stock volume, etc. In other words, it involves researching and analyzing stock markets to forecast the future value of assets. Technical analysts don’t consider the intrinsic value of stocks to perform their analysis.

However, they study stock charts to understand the trends & patterns of any stock and figure out how it would perform in the future. This is done via charting software which helps analysts to study data related to stock markets, figure out patterns in it, and analyze trends. It is, therefore, used to make predictions regarding the market based on past & present data.

Difference Between Fundamental Analysis & Technical Analysis

 Now, we will learn about the difference between technical analysis & fundamental analysis based on different parameters.

• Time Period: Fundamental analysis follows a long-term approach. However, technical analysis is done on a short-term basis.
• Evaluation: While performing fundamental analysis, the intrinsic value of the stock is looked for to make a long-term investment. On the other hand, for technical analysis, evaluation is done based on the price trends of a stock.
• Objective: The primary objective of the fundamental analysis is to make an investment while the objective of performing technical analysis is to trade. Herein, investment is for the long term & bears less risk whereas, Trading is for short period and involves high risk.
• Decisions: In the case of fundamental analysis, decisions are made as per financial statements and available data. However, in the case of technical analysis, the decisions are based on charts and price-movement trends.
• Data Considered: Both present and past stock data are taken into consideration for fundamental analysis whereas, in the case of technical analysis, only the past data matters.
• Useful For: Fundamental analysis is beneficial for investors who plan to make long-term investments. In contrast to this, technical analysis is suitable for day traders only.
• Assumptions: While performing fundamental analysis, no assumptions are made. However, while making technical analysis, many assumptions are taken into consideration.
• Helps In: Fundamental analysis helps understand whether any stock is undervalued or overvalued. On the other hand, the technical analysis predicts the right time to sell or purchase any stock.

Steps to Carry Out Fundamental Analysis

To perform fundamental analysis, four simple steps are followed. These are:

• Industry Analysis: Includes the study of government intervention, socioeconomic variables, market competition, sales trends, customer satisfaction, etc.
• Company Analysis: Involves an evaluation of the company’s profile, profitability, products, services, etc.
• Financial Modeling: Involves the creation of spreadsheet data for the company’s expenses, earnings, etc. to calculate future events & decisions.
• Valuation Analysis: The process to estimate the approximate value of an asset (equity, business, income security, real estate, commodity, etc.).

Steps to Carry Out Technical Analysis

To perform Technical Analysis, these steps are followed:

• Identifying Securities of Your Interest: This implies researching the sectors that are blooming currently.
• Identifying Best Strategy: Selecting the best trading strategy for selected stocks is important because every strategy doesn’t work the same for every stock.
• Choosing Trading Account: The right trading account along with support and functionality is required. You can approach any of the exchange-registered firms to create your trading account.
• Selecting Tools: Select tools (average directional index, relative strength index, on-balance volume, etc.) that meet your trading strategies & requirements.
• Paper Trade: Before starting to trade, practice simulated trading where you can buy & sell stocks without risking your real money.
• Setting Stop-Loss: Always set your pre-defined limit to bear a loss.

Which is Better: Fundamental Analysis or Technical Analysis?

After understanding the difference between both, we can now say that both fundamental analysis and technical analysis are important. However, they are for different types of investors.

Fundamental analysis is appropriate for people with long-term investment plans. On the other hand, short-term traders can benefit from technical analysis.  It is because technical analysis assists in researching & analyzing stocks to forecast future outcomes based on past prices and trends. Therefore, it lets you know how to make profits in a short period.

It is hence not a good idea to say that any one of them is better than the other. It is because both have different purposes to serve, and both are equally important in their own place.