Understanding of Fundamental Analysis Vs Technical Analysis


Both fundamental analysis and technical analysis are common methodologies used by investors globally to research and forecast future trends in stock prices.  However, they are different in several ways. Which study is better?

Let’s look at the difference between fundamental and technical analysis.

Fundamental Analysis

Fundamental Analysis is a type of method used to evaluate the securities with an attempt to measure the intrinsic value of the stock which referred to as “Real Market Value” to identify undervalued stock. The most common data used in fundamental researches are to gauge company management efficiency, business competition environment,  financial data such as earnings, assets, liabilities cash flow and dividend payout ratio which can be found in the annual report of a company. All of these data can provide a clear picture to investors where the company currently stands and help them to decide on long term investment.

Fundamental analysis’s investors will study all the relevant factors that already exist; they will gauge to forecast future earnings and determine how much the stock value worth in future. They will only buy when the stock price is 20% below the intrinsic value which considers a range where they called ‘margin of safety’.

In summarise, with an in-depth understanding of the financial information of a company, it allows investors to understand more about the future development of the company which can affect the company value in future. However, using this technique may be time-consuming if to compare with technical analysis. It entails hours of reading and understanding of the company financial health and business durability.

Technical Analysis

Technical analysis is a short-term approach statistical method used to forecast the direction of future price through historical price and volume data. Instead of using the stock chart to identify patterns and trends, the technical analyst does not measure the intrinsic value of a security.  They will use the analysis of the company’s technical indicators, such as moving average and price action such as support and resistance. It is to measure buy/sell pressure, an overall market trend to determine the right price to open or close a position to maximise their return and minimise the losses.

Technical analysis use combined with stop losses and take profits order to traders to set their target profit and limit losses.

To summarise, traders can judge on how the overall market is heading based on past price and volume data by using technical analysis. However, by using too many technical indicators may produce confusing signals which may affect trader decision. Besides, technical analysis does not take into account the underlying fundamental of a company.

Conclusion

Investors use fundamental or technical analysis or by using both of these techniques to make an investment decision. Fundamental analysis attempts to calculate the intrinsic value of the stock by using the data such as revenue, expenses, growth prospects and competitive landscape. While for technical analysis, they will use the past market activity and stock price trends to predict future price movement. As with investment strategy, there are advocates and detractors of each approach. There can be different routes for different people.

Basis Comparison
Fundamental Analysis
Technical Analysis
Data Find intrinsic value by using  the company’s financial data Use price and volume data to predict future price movement
Time horizon Long-term approach A short-term and long-term approach
Function Investing Trading
Stock Bought When the price falls below an intrinsic value When they believe they can sell it for a higher price
Usefulness Identify underpriced and overpriced stocks To find the possible right price to enter and exit

Written by Stella Goh | 28 March 2019

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Site last updated April 23, 2019 @ 7:58 am; This content last updated March 28, 2019 @ 10:21 am