Contrary to what many people still like to believe, investing or trading in stocks is not just a game of luck. Yes, the luck factor does come into play, but a lot of studies and analyses go into this whole stock trading affair.
For instance, it is not enough to only know how to invest in amazon stock. Blindly purchasing stocks cannot ensure impressive returns on your investment or help you achieve financial targets unless you do proper homework before investing. That includes understanding the dynamics of the company and its performance, how it can affect you, how the stock had been performing, its trending performances and so much more.
Stock analysis is an extremely critical part of stock trading; the only way to attempt predicting the movements of a market that undergoes frequent volatility. And when it comes to the analysis of stocks and financial markets, there exist two major schools of thought –
- Technical analysis
- Fundamental analysis
Fundamental analysis of stocks considers the economic factors that might influence that company. Technical analysis focuses on the price movements of stocks and uses the information to try and predict price changes in the future.
In this article, let us explore the differences between these two approaches based on certain parameters.
For technical analysis of stocks, experts use different kinds of charts. They generally believe that analyzing the financial statements of a company does not provide extra information about its stocks. All relevant data are already included in the stock price. So, it is better for the investor to analyze and understand the stock chart and detect hints about future movements of the stock price.
In the case of fundamental analysis, experts analyze the financial statements of a company and try to gauge its net worth. They consider balance sheets, cash flow statements, income statements in the process. They aim to determine the intrinsic valuation of the company by eliminating the projected cash flows in the future to reach a net present value.
Usually, fundamental analysis is more suitable for long-term stock investments, looking at historical price data spanning over multiple years or quarters. Investors often bank on fundamental analysis to wait unless the intrinsic value of the company is understood, to rule out any chances of mispricing the stocks in the short term. But they also consider assumptions like the stock price will correct itself over a longer period of time, sometimes years. They are more interested in the financial statements of the company and fluctuations in earnings per share.
So, put in different words, the data that is needed for fundamental stock analysis is generated gradually over a long time, which is why analysts have a long-term approach. However, technical analysis is great for short-term trading. It uses stock price data that is from shorter durations, like the recent performance or real-time changes, for evaluation. Parameters such as volume and price data of stocks are of greater importance to technical analysts.
The purpose or goal of both fundamental and technical analysis is different.
Technical analysts are more adept at identifying stocks suitable for short or medium-term trading. But fundamental analysts aim to identify value stocks that are ideal for long-term investments.
What do experts say?
As with all other things, there are various expert opinions about fundamental and technical analysis. Many experts strongly believe in the outcomes in technical analysis, while others feel it is an unproven technique.
But these two approaches need not necessarily be opposing ideas when you want to analyze stocks. They can also be combined to achieve a collective target. For instance, fundamental analysis can be used to identify an undervalued stock, and technical analysis can be used to spot the best entry and exit points for the same position. Again, often intraday traders might resort to fundamental analysis especially if they want to break out near to an earnings report. They can use technical analysis to secure an idea if the stock can possibly overtake the earnings.
However, mixing technical and fundamental analyses is not widely accepted. But the benefits in achieving specific financial targets can also not be ignored.