Technical analysis and fundamental analysis are the two methods to analyze the financial market. Technical analyst assume that all the information worth knowing about a stock or company is already reflected in a stock price. They base their decision by studying the pattern in which stock prices move up and down.
Technical analyst is only bothered to recognize patterns in stock price so that the best time to get in and out can be known. These analysts are not concerned what the company does and how much profit it makes.
Following things are generally used by technical analysis:
- Stock price movement over a period of time
- Stock volumes in comparison to price movements
- Trading pattern to find out when to get in and out by deciding support level, target price
- Stocks average price over a period of time – Moving averages.
If you want to invest in a stock after knowing how the underlying business is doing financially, then fundamental analysis is best for you. If you have done a thorough analysis, then you can easily identify potential threat to the business from a troubling economy or industry specific threat.
Basically, fundamental analyst try to find out the intrinsic value of a stock. Then, by comparing it with the actual price, they will come to know whether a stock is overvalued or undervalued. Overvalued stock means its market price exceeds the intrinsic value.
Fundamental analysis also look at economic and financial factors that influence a business.
Here are three important points to understand the difference between fundamental and technical analysis:
- Fundamental analysis starts with the income statements, balance sheet, statement of cash flows, and financial tools to analyze company’s financial statements, while technical analysis starts with charts of share price and volume.
- Technical analysts believe that company’s financial statements has no relevance for analysis of a stock since price already includes relevant financial and economical information. Fundamental analysts believe on intrinsic value of a stock. If the market price is below the intrinsic value, then they buy the stock.
- Technical analyst invests for a short duration, where as fundamental analysts invest for a long-term.
Both the techniques are good and a combination of both are used by traders and investors across the world. For instance, an investor after finding a stock to buy, may take help of technical analysis to know the best entry and exit point to take a position. Similarly, a trader may find a breakout in charts before earnings are published but take a position if fundamental analysis suggest that the earnings will beat the market.