Analysis of any share is mainly done in two ways namely Fundamental Analysis and Technical Analysis. Since you can select shares by any of these two analyses, sometimes confusion arises about whether to select stocks through both these analyses or to take advantage of any one method to gain profit from the stock market. To reach the final decision, you must know the difference between fundamental analysis and technical analysis.
Investment in the stock market needs a lot of study and analysis without which you are prone to losses with your investments. The first step is to choose the best stocks to invest money in among the many listed on the stock market. And the selection of share needs analysis and there are various tools used for them.
Some people choose the stocks with the help of any of the one analysis. Still, top analysts believe that while doing technical analysis, some fundamentals should also be seen and similarly some technical should also be seen while doing fundamental analysis. Apart from this, there are many recommendations or tips regarding investing in the stock market, but you should do the analysis yourself. In such a situation, let us know what is both the analysis and what is the difference between the two.
Fundamental analysis is a method of assessing the intrinsic value of a stock. It combines financial statements, external influences, events, and industry trends. It is important to note that a stock’s intrinsic or fair value does not change overnight. Such analysis helps you identify key attributes of the company and analyze its actual worth, taking into account macro and microeconomic factors.
In this, we look at the company’s financials and ratios like P/E Ratio and P/B Ratio. Apart from this, we analyze other ratios as well. Now if we talk about the PE ratio, if its value is less then it means that there is a lot of growth in it. When the PB ratio is low then it means that the stock is undervalued. Apart from this, we also look at beta in fundamental analysis, which if more than one means that it is more volatile than the market. Companies that have high dividend yields and are debt free are fundamentally very strong.
Technical analysis is a means of examining, reading, and predicting price movements or changes in the financial markets, by using historical price charts and market statistics. It is based on the idea that if a trader can identify previous market patterns, they can form a reasonably accurate prediction of future price changes as well.
Technical analysis is a bit more complex than fundamental analysis. Under this, stocks can be analyzed with the help of 30-40 technical indicators like the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Bollinger Bands. In this analysis, the strength and trends of the stock are estimated.
Difference between Fundamental Analysis and Technical Analysis
Fundamental and technical analysis is done on certain factors like timing, risk, and tracking.
Definition: Fundamental Analysis is a practice of analyzing securities by determining the intrinsic value of the stock. Fundamental analysis is usually done at a time when you have to hold a stock for a long period of time. Under this, such stocks are identified which will strengthen over time. While Technical analysis is a method of determining the future price of the stock using charts to identify patterns and trends. Technical analysis is done to invest money in stock in the short term. In this, the bullish stock is identified.
Ideal For: Fundamental Analysis is ideal for long-term investors and they heavily rely on the value of the company. Technical analysis is used by short-term traders and traders use charts and indicators to assess the future price of shares.
Risk– Investing in fundamentally strong stocks carries less risk whereas an investment based on technical analysis is a bit risky. Because through fundamental analysis potentially good companies are selected which will have less impact on operations in long term. While in technical analysis, short-term implications are there over the stock price and the reasons may be many like political stability, news, and any other event.
Tracking– Fundamentally strong stocks are easy to identify as you tend to do it over a long period of time. Whereas in technical analysis, sudden fluctuations have to be analyzed.
Value: In fundamental analysis, fair value is developed by assessing the domestic and international environment along with the business, industry, and market of a company. On the other hand, through the historical returns and price changes in the technical, further fluctuations in prices are assessed.
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You can select a share for your investment by any method discussed above but you must know the difference between fundamental and technical analysis before proceeding further. Both methods have their pros and cons and also the suitability of both is different. Fundamental analysis is good for long-term investors whereas, for a short-term investor, technical analysis is fruitful.