Difference Between Fundamental and Technical Analysis
Fundamental Analysis studies all those factors which have an impact on the stock price of the company in future, such as financial statement, management process, industry, etc. It analyzes the intrinsic value of the firm to identify whether the stock is under-priced or over-priced. On the other hand, technical analysis uses past charts, patterns and trends to forecast the price movements of the entity in the coming time.
Stock prices change every minute, and so every investor is keen to know the future price trends of the stocks of a company, so as to make investment decisions rationally. For this purpose fundamental analysis and technical analysis are used to research and forecast price trend of the stock in future.
Definition of Fundamental Analysis
This technique can be used to analyze several trading instruments including indices, shares,currency rate and commodities. It uses fundamental data such as the employment rate, country’s GDP,profitability rate of the company and medical related factors of the subject region.
When trading shares, fundamental analysis can be applied to evaluate certain factors such as the news, performance of a company and environmental conditions. A good example would be an investor who wants to determine whether he or she should purchase shares from company ABC which is in the airline transport industry. Factors such as current and future expected political stability, oil price and tourism rate would form the fundamental concepts to be analyzed.
It is a three-phase analysis of:
- The Economy: To analyse the general economic status and condition of the country. It is analysed through economic indicators.
- The Industry: To determine the prospects of various industry classification, with the help of competitive analysis of industries and industry life cycle analysis.
- The Company: To ascertain the financial and non-financial characteristics of the firm to find out whether to buy, sell or hold the shares of the company. For this purpose, sales, profitability, EPS, are analysed along with management, corporate image and product quality.
Definition of Technical Analysis
Technical analysts are the individuals who believe the price charts contain all the information needed to make an investment decision.They believe that all the content of a specific asset is reflected in the price trends.They use price trends, charts,patterns and mathematical chart indicators to guide them through the investment decisions. It applies mostly to short-term trading cycles. The reason behind this is that traders who seek short term results are looking for minimal movements over short periods of time.
Tools used for Technical Analysis
- Prices: The change in the price of securities is represented in the change in the attitude of the investor and the demand and supply of securities.
- Time: The degree of price movement is a function of time, i.e. the time taken in the reversal of trend will determine the change in price.
- Volume: The magnitude of price changes can be seen in the transaction volume that characterizes the change. Suppose there is a change in the price of shares, but there is a small change in the transaction volume, then it can be said that the change is not very powerful.
- Width: The quality of change in price, is gauged by ascertaining if the change in trend is dispersed across many industries or it is specific to a few securities only. It reflects the degree to which changes in the price of securities have taken place in the market as per the overall trend
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