Differences between Fundamental Analysis and Technical Analysis
Table of Contents
Differences between Fundamental Analysis and Technical Analysis
The following are some of the differences between fundamental and technical analysis.
1. Purpose:
Fundamental Analysis: It seeks to forecast stock prices on the basis of economic, industry and company statistics. However, the most important variables considered in deciding stock prices are earnings and dividends.
Technical Analysis: It mainly focuses on internal market data.
2. Long-term & Short-term Price Movement:
Fundamental analysis: It seeks to predict long-term values of securities. Generally, the fundamentalist is a conservative who invests his funds for a long term. Long-term investors buy a high dividend paying stock and hold it for many years through market fluctuations.
Technical Analysis: The technical analysis determines the short-term price movements of the securities. The technician is a trader who buys and sells securities for short-term profits. He does not believe in buying and holding of securities. He gives importance to total returns, i.e., the realized price less the price paid, plus dividend received.
Fundamental Analysis: The fundamental analyst estimates the intrinsic value of shares and purchases them when their market price is less than the intrinsic value. He sells the shares when the market value of shares is more than the intrinsic value and earns profit. Thus, he works on long-term basis.
Technical Analysis: The technician believes that there is no real value to any stock. According to him, stock prices depend on demand and supply forces which in turn are governed by rational and irrational factors.
4. Finding the trend
Fundamental Analysis: In fundamental analysis, there is no scope for finding out the past trend of share and also the fluctuations in the price trend.
Technical Analysis: Technicians believe that past trend will be repeated again and the current movements can be used for studying the future trend. In other words, in respect of all securities there are cycles and trends which will occur again and again. Under technical analysis, charts and tools are used to compare various price movements. The technicians view price changes and their pattern mainly through price and volume statistics and tools such as Dow theory, Elliot Wave theory, pattern identification moving averages, advance or decline, charting styles, odd lots, short selling, put or call ratio, relative strength of indicators and Fibonacci levels.
5. Assumptions
Fundamental Analysis: There are no assumptions in fundamental analysis.
Technical Analysis: Technical analysis works on the basis of various assumptions which have been outlined earlier.
6. Decision Making
Fundamental analysis: The fundamental analysis carefully studies the financial statements, demand forecasts, quality of management, earnings and growth. Then they judge the prices of securities. Thus, the fundamental analysts are making decisions based on their own (subjective) opinions.
Technical Analysis: It listen to what the market has to say. So, the view of the market is the most important factor in determining stock prices.
7. Usefulness
Fundamental analysis: It helps identify undervalued or overvalued shares.
Technical analysis: It is useful in timing a buy or sell order.
