An important part of any beginner’s learning strategy should be on knowing the difference between fundamental analysis and technical analysis. A lot of investors/traders do a fundamental or technical analysis before putting their money at stake. As the name suggests, fundamental analysis is done to know about the fundamentals of a company – its reputation, balance sheet, income statement, etc. Technical analysis, on the other hand, is concerned with studying the past performance of a security to gauge its price movements in the future. In the following paragraphs, we will take a look at the other difference between these two methods of analysis.
Some of the legendary investors that the world has ever seen believe that fundamental analysis is one of the best ways to know about everything that is there to know about a security. The aim of a fundamental analyst is to get an understanding of the important parameters of a company’s performance such as cash flow statement, balance sheet, income statement, earnings per share, etc. Fundamental analysts spend their time in knowing about the state of the economy of a country. They do an analysis of the prevailing interest rates and consumer price index. It is not uncommon for a fundamental analyst to factor in the effect of global economic climate on the prospects of a company. The premise of fundamental analysis is that if a company has been performing consistently well and generating considerable profits, its long-term prospects are bright. Fundamental analysts believe that the stock market does not really represent the true value of a company because of the speculative nature of traders. Fundamental analysts believe in the concept of investing – holding on to a good stock for a long period of time to gain dividends and see their investments appreciate. Fundamental analysis has probably been around since the time the first stock market opened. Fundamental analysis is widespread, and a majority of investors around the world support this form of analysis while investing in a security.
Technical analysts look at the historical prices of a security in order to predict its future trends. Technical analysts believe that there is no need to do a fundamental analysis of a company as its stock price is the best indicator of its past performance. Contrary to the fundamental analysts’ school of thought, the technical analysts believe that a security has the ability to “correct” itself, and the current price of its stocks represents the attitude of investors towards it. Technical analysts seldom pay any attention to the economic performance of the company; they are more interested in knowing about the performance of its stocks. All the attention of a technical analyst is focused on the historical price chart of a stock. They also weigh in the volume of the traded stocks, and are always looking at an entry point into the stock by doing an analysis of the moving averages. So basically what a technical analyst is interested in knowing is how a stock fares in the next hour, day, or a week. They do not have a long-term plan to stay invested in a security, and many times the trades are carried out in the fraction of a second.
Although the investment purists have for long shunned technical analysis, it has gained some acceptance in the recent past. Many broking firms now use a combination of fundamental and technical analysis to gain a better understanding on their investment prospects. If you are looking to put money into the stock market because you want to attain long-term gains, you should be looking at doing a fundamental analysis. On the other hand, if you are looking at benefiting from the volatility of the stock market on a short-term basis, technical analysis will serve you better. Concluding, we hope that this write-up helped you in knowing the differences between these two forms of analysis.