The two most popular method of picking up stocks is fundamental and technical analysis.
If a trader wishes to buy or sell a particular stock out of the twenty stocks available, then he can use either fundamental or technical analysis to decide where to put in the money.
While both the method takes a stock trader in deciding as to which stock to choose and the trend in stock prices, the approach, however, is different.
If a trader wants to buy or sell a stock on the basis of its financial statements, then fundamental analysis shall be best suited for him. On the other hand, If the trader looks up to the price, volume and market trends for his research, then the technical analysis is his form of approach.
Few traders also use both the methods in studying the company’s overall performance as well as its past trends in terms of price, volume, and market movement.
Whichever method a trader may identify, the most important idea is to understand the difference between the fundamental and technical analysis so as to ensure a clarity in the market approach, as both the methods are poles apart.
So let us understand a few of the most important distinctions between the two methods:
- The fundamental analysis evaluates the financial statements and financials of a company to help the trader decide a buy or a sell. He basically focuses on the performance of the company in comparison to its competitors. The market is volatile and the share prices may not be the same forever. Based on this fact, the fundamental analysis trader holds the stock which is undervalued or sells the stock which is overvalued.
A trader dealing in fundamental analysis ensures studying everything related to the stock price of the company and then takes the decision.
Technical analysis, on the other hand, has nothing to do with the financials of a company. It basically concentrates on the stock charts and based on it makes the decision to invest money on any stock.
- Under fundamental analysis, a trader needs to study the intrinsic value of the company. Accordingly, he understands whether a particular stock is undervalued or overvalued. Post this he needs to wait till the time the stock reached its true prices. So this approach is more suitable for long-term investments.
Technical analysis is suitable for short-term investments as the trader can quickly study a day chart or an hourly chart of a company and decide on the buy-sell position for that company.
- The fundamental analysis evaluates the financial statement of the company such as the profit and loss account, cash flow statement, balance sheet to analyze the past performance and future potential of the company.
Technical analysis studies the stock price movement based on patterns, charts and previous stock price movement. It basically analyses and makes a comparison of the market psychology on the same chart as a company and then studies trends.
- Since studying and understanding the various financials based on revenue and various ratios takes a lot of time, it becomes a tedious task and at times takes quite a lot of time to observe a particular stock.
The fundamental analysis does not exactly specify the entry or exit levels as compared to technical analysis. It may happen that a trader enters the market at a harsh time.
Technical analysis is a fast approach towards understanding the market. It quickly views the prices and volumes of a stock. It specifically indicates the entry and exit levels and makes the choice of stock easy for a trader.
- Fundamental analysis uses various financial ratios such as price-earnings ratio (PE ratio), Return on Equity ratio (ROE), Debt equity ratio (DE ratio), Earning per share (EPS) etc to decide on the stock.
The technical analysis makes use of various financial indicators such as RSI, MACD etc to understand the stock price movement.
Though both the methods well justify the choice of stocks, a trader shall always make his approach more researched and pronounced while deciding on the method to avoid any confusion in the future.