Difference Between Fundamental Analysis and Technical Analysis

It is crucial to have a good understanding of the stock market to make rational investment decisions. With over 5,000 stocks to choose from, it becomes important to decide which stock can return profits. In this regard, market analysis is quintessential, helping you to review securities to determine their worth and potential future performance. Two primary methodologies of market analysis: Fundamental analysis and Technical analysis. These are quite essential to investors to make decisions like buy, sell or hold a particular stock.

What Is Fundamental Analysis?

Fundamental analysis is a thorough process of assessing different stocks through an examination of the factors that determine a company’s real business and its future potential. This method includes a detailed analysis of the different elements, including annual and quarterly financial statements, macroeconomic factors like industry conditions, and economic conditions overall.

The main aim of fundamental analysis is to determine the intrinsic value of a company’s stock. This intrinsic value, which is arrived at after a thorough analysis of the qualitative and quantitative factors, acts as a very good benchmark to the existing market price. Investors may use the discrepancies between intrinsic and market values as opportunities to buy or sell.

Key Aspects of Fundamental Analysis are:

• Financial Statements:

Key financial documents that the fundamental analysts analyse include the income statement, balance sheet, and cash flow statement. These documents are a treasure trove of a company’s sales figures, profit margins, level of debts and leadership effectiveness. 

An example of how financial statements can help you in market analysis is the dot-com bubble of the late 1990s when several technology companies recorded massive revenue growth with no matching profits, which led to inflated stock prices. Yet, one look at the poor financial fundamentals would have indicated the unsustainability of such a valuation in the context of the fundamental analysis.

• Company Management:

The quality of the company leadership is a major factor in the performance of the company. Fundamental analysis looks at the history, background, qualifications, achievements, and also behaviour of the top management cadre. An effective management team usually shows a good history of stewardship, operating achievements, industry awareness, and also shareholder compliance. 

• Competitive Advantage:

Fundamentals of companies with competitive advantages, including proprietary technology, economies of scale, strong branding, or high barriers to entry, are much stronger in nature. These benefits protect them from competitors and also ensure continued profitability. 

A typical case is Asian Paints, which utilised the unity of its product and services, brand loyalty, and supply chain optimisation to sustain a solid competitive advantage in the paints sector. This resulted in a steady increase in revenues and also stock price. However, do not take this as a recommendation because the market is dynamic and competitive advantages could possibly diminish or fade out over time. 

• Macroeconomic Factors:

The broader economic environment has a very deep impact on corporate profitability. Fundamental analysis considers all the variables, such as economic growth, interest rates, inflation, and regulatory changes, in assessing the external operating environment. Good economic conditions enhance the company’s chances, while bad conditions can lower profitability. 

For example, in the global financial crisis of 2008, fundamental analysis would have revealed that the economic recession had a very negative effect on the earnings and valuations of the company, causing the investment in the portfolios to be realigned.

Overall, fundamental analysis is based on a rational valuation of the business attributes, under the assumption that stock prices tend to approach the intrinsic business value in the longer run.

How To Do Fundamental Analysis on Angel One?

• Open the Angel One App and find the stock you want to analyse from the Search bar.
• Click on ‘ ‘Stock Details’ and then on ‘Fundamental’. 
• Here, you can scroll down and check the fundamental analysis of the stock you are viewing.

What Is Technical Analysis?

Contrary to the fundamental analysis, technical analysis is a much more trading discipline that assesses investments through statistical analysis of the market activity, including past prices and volumes. While fundamental analysis tries to determine the fundamental value of a security, technical analysis uses charts and technical indicators to spot patterns that may indicate future price changes.

Key Aspects of Technical Analysis

• Price Charts:

Analysts carefully study the price charts on different time frames to spot trends, reversals, support and resistance levels, and also chart patterns. Price trends and reversals represent bullish or bearish momentum, whereas the support and resistance levels show the critical levels. The chart patterns give an idea of what could be the future price action. For instance, the index pattern “head and shoulders” is regarded as one of the most popular chart patterns and is very much used by technical analysts in their trading decisions.

• Volume:

Volume is a very key determinant of a price trend’s strength or weakness. The prices that are increasing together with the volumes are a sign of the strength of the upside momentum, while the decreasing prices, together with the volumes, display weakness. Volume is usually ahead of the price movements. Volume analysis is one of the methods used in technical analysis, and an example is the concept of “volume confirmation,” where the technicians are waiting for growing volume as a signal of price movement validation that signals strong market participation and conviction.

• Technical Indicators:

Moving averages and oscillators are examples of indicators that complement the price and volume data analysis by smoothing and signalling momentum. Moving averages inform about the general direction, but oscillators measure if the market is overbought or oversold. For example, the “Moving Average Convergence Divergence” (MACD) is an example of a momentum oscillator used in technical analysis for determining the changes in trend direction and trade entries or exits.

• Buy/Sell Signals:

Buyers in uptrends lurk when the prices retrace to well-defined support levels, or when oscillators turn to the oversold conditions. On the other hand, short positions are taken when the prices reach the resistance levels or when the momentum oscillators indicate over the extension. Stop-loss orders are used for risk management and also to capture gains as prices move in one’s favour. The buy/sell signal examples in technical analysis include the “golden cross” and “death cross,” where the short-term and long-term moving averages crossover is an indicator of the bullish and bearish sentiments, respectively.

Technical analysis assumes that all fundamentals are known and already priced in the stock, and the prices tend to move in trends because of supply and demand.

How To Do Technical Analysis on Angel One?

• Open the Angel One App and find the stock you want to analyse from the Search bar.
• Click on ‘ ‘Stock Details’ and then on ‘Technical’. 
• Here, you can scroll down and check the technical analysis of the stock you are viewing.
• You can also perform further technical analysis on your own by going to the chart of the stock and adding indicators.

Difference Between Fundamental Analysis and Technical Analysis 

Fundamental and Technical analysis have the same goal of forecasting future stock performance but they differ greatly in method, period, parameters, software use, key assumptions, discipline, investment horizon and risk management style. Below is a table that briefly outlines the major differences between fundamental analysis and technical analysis: 

Aspect	Fundamental Analysis	Technical Analysis
Time Horizon	Long-term (1+ years)	Short-term (weeks to hours)
Parameters Assessed	Company and industry characteristics (financials, growth, management)	Market-generated data (prices, volumes)
Key Tools	Financial statements, industry data, economic indicators, business ratios	Price charts, technical indicators, proprietary systems
Key Assumptions	Markets undervalue companies in the short-term, prices eventually align with value	Prices reflect all known fundamentals, focus on supply and demand dynamics
Disciplines	Accounting, financial modelling, macroeconomics	Applied mathematics, statistics, behavioural economics, chart patterns and indicators
Investment Horizon	Long-term buy-and-hold (until intrinsic value reached)	Short-term swing trading (positions, day trades, stops)
Risk Management	Margin of safety (intrinsic value vs. market price)	Stop-loss orders, trailing stops

 

Although Fundamental and Technical Analysis provides different sets of criteria, many investors use a mix of both to make educated decisions. Fundamental analysis gives clues on the intrinsic value of a company, while technical analysis shows how supply and demand factors affect the price. The strength of each approach will complement each and the short and long-term strategies would align with each other. 

Conclusion

To sum it all up, fundamental analysis uses financial statements, management quality and macroeconomic factors to evaluate a business’s worth, presuming the fact that stock prices tend to move towards intrinsic values in the long run. Technical analysis uses historical prices and volumes to predict price movements using trends and indicators, believing that all fundamentals are reflected in the market.

By combining long-term perspectives coming from fundamental analysis with short-term signs provided by technical analysis, you can make much better decisions. Instead of using only one method, you can draw information from both methods to recognise attractive risk-return situations across different investment periods.

In the upcoming chapters, we will dive deeper into fundamental and technical analysis to learn all about the tools investors generally use to assess different market conditions and make strategic decisions.