When it comes to approaching the stock market, fundamental analysis and technical analysis are the two approaches that are used by investors and traders. The fundamental analysis and technical analysis are the two opposite ends of a tunnel, i.e. they are in no way similar to each other. Before understanding which one is better, let us have a look at the basic difference between the two.
The fundamental analysis is used for the evaluation of a company and to find the intrinsic value of the company in the stock market. Every aspect of the company such as the overall economy, industry conditions, financial strengths, and management of an individual company is taken into account in the fundamental analysis. Under the scrutiny of a fundamental analyst, the earnings, expenses, assets, and liabilities are all taken into account. So, here the factors that affect the value of the assets of the company are looked upon closely and considered.
The technical analysis is very different from the fundamental analysis. The main aim of the technical analysis is not to predict the future of stocks but it is to identify the scenarios that are most likely to take place in the future. It is completely based on the prices of the stocks and the volume data. The stock charts and stock market trends are used by technical analysts to predict the behavior of the stocks in the future. Unlike the fundamental analysis, the economic value is not considered in the technical analysis.
The difference in Fundamental and Technical Analysis
The fundamental, as well as technical analysis, are equally responsible for determining the future of stock in the stock market. But either of the two can be used for evaluating the future trend of the stock.
The fundamental analysis is used to check the basic health of the company, i.e. where it stands in the stock market as compared to its competitors. Also, the economical strength of the company is also taken into account by the fundamental analysts. So, in the end, the fundamental analysis depends upon the profit that a company can generate and the total value of the company’s assets.
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On the other hand, the technical analysis has nothing to do with the assets, the fundamental of the stocks, and the financial value of the company. Only the stock market trends, price action, and volume data are the factors that the technical analysts are concerned about. Most investors behave the same in various situations, so there are chances of the patterns to repeat in the stock market trend.
Fundamental & Technical Analysis-Which is better?
Now, we know the difference between fundamental and technical analysis. But, the most common question that arises is which amongst the two is better. This is a debate that has been in continuation forever. It needs to be understood that both of the analyses have their own importance and have different places in the market.
For long-term investments, fundamental analysis is preferred. Whereas, in the case of short-term investments, technical analysis is taken into consideration. Also, a combination of both, fundamental and technical analysis can be considered in the case of medium and long-term trading or investment plans.
Pros of Fundamental Analysis
Mentioned below are some positive points of the fundamental analysis:
- It is helpful in a long-term investment.
- Its main focus is the business improvement, rather than just the stock prices, which provide the actual worth of the company.
- These lead to investing in companies that have a good approach and are financially sound.
- There are more chances of fundamental analysis being correct over a long period of time.
Cons of Fundamental Analysis
Here are some disadvantages of the fundamental analysis:
- Fundamental analysis is a very time-consuming process.
- It is very difficult to find the unique data of a company.
- It is not possible to forecast the short-term price movements in fundamental analysis.
- There is no time frame for how long would an investment last in this case.
- There is a possibility that good stock is bought or sold at bad timing.
- It is a very complex process.
Pros of Technical Analysis
Here are some advantages of the technical analysis:
- The stocks are very easy to analyze by the technical analysis.
- Time can be saved by automating some of the tasks.
- More stocks can be covered in a short duration of time.
- The entry and exit time of a stock can be specified.
- It is less complex than fundamental analysis.
- It is easier to analyze the stock charts and trends.
Cons of Technical Analysis
The drawbacks of technical analysis are mentioned below:
- Only some technical approaches can be backtested.
- It is not easy to select a good indicator in this case.
- There can be different conclusions for the future of a single stock by two different technical analysts.
- The charts change very rapidly, so the time frame for analysis is very less.
- This method has a low win rate relatively
Can Technical & Fundamental Analysis Be Used Together?
There are so many effective ways through which the technical and fundamental analysis can be used together. There are many investors and traders who use both these approaches at the same time for better outcomes. It is easier to find a good company for investment and the time to sell and buy the stocks by using both approaches at the same time. So, the answer to the above question is YES!. It is feasible if we use technical and fundamental analysis together.
At last, we reach a conclusion that despite the differences in the methodologies of technical and fundamental analysis, both of them are very effective approaches for investors and traders nowadays. It is very difficult to choose a single method of analysis and find a better one amongst them. It is a discussion that would last forever and still wouldn’t reach an answer. So, do your research and go for what you think would be useful for you. Good Luck and Happy Trading!