Stock market analysis relies on two broad philosophies: fundamental analysis, and technical analysis - concepts that have caused physical fights between stock market enthusiasts - but what are either of these and is there a way for both to co-exist?
Fundamental Analysis
This is the art and science of determining the value of a stock based on hard facts, research and financial analysis that translates into a view of whether one should buy or sell the stock of a company.
Using a combination of methods, this process allows for a more holistic and all-round understanding of the intrinsic value of a company's stock.
Technical Analysis
This concept involves tracking the price and trading volume of a stock so as to look for patterns, and use this analysis to predict the future price of the stock.
Unlike fundamental analysis, this method uses various technical indicators to predict price movements rather than using information about the company's performance and future prospects.
Here are some more difference between the two processes:
Feature | Fundamental Analysis | Technical Analysis |
Focus | Company financials, industry trends, and economic factors | Price charts, trading volume, and technical indicators |
Time Horizon | Long-term (months to years) | Short-term to medium-term (days to months) |
Decision Basis | Intrinsic value, potential undervaluation/overvaluation | Historical trends and patterns, future price prediction |
Best Suited For | Identifying fundamentally strong companies for buy and hold | Active traders seeking short-term price movement opportunities |
Pros | Fundamental analysis reveals a company's underlying health and helps uncover stocks with solid long-term growth potential.
It allows you to determine if a stock is undervalued (potentially a good buy) or overvalued (potentially a good sell). Based on facts and numbers, removing emotional biases that can sometimes influence traders. | Charts and patterns offer visually accessible information for interpreting price movements.
Well-suited for identifying buy/sell signals in the near term, favoured by active traders.
Can be applied to various markets and across different timeframes, from scalping (minutes) to swing trading (days/weeks). |
Cons | Requires understanding of financial statements and complex economic data.
Thorough fundamental analysis necessitates detailed research and may not be suitable for quick trades.
Some interpretation of company data is involved, and different analysts may reach varying conclusions. | Enough traders using the same indicators can create market movements that confirm the predictions.
Doesn't provide information about a company's inherent value or long-term viability.
Chart pattern interpretation can vary, leading to differing views on entry and exit points. |
The Combination Approach
Many successful investors don't view fundamental and technical analysis as mutually exclusive. Here's how they might be combined:
Fundamental Screening: Find companies with healthy financials and a promising outlook through fundamental analysis
Technical Timing: Employ technical analysis to find favourable entry and exit points for trades in those filtered, fundamentally sound companies.
The choice between fundamental and technical analysis, or utilizing them in tandem, depends on your individual investment philosophy. Fundamental analysis offers depth and a focus on long-term value, while technical analysis provides tools to act on short-term price movements.
Understanding the pros and cons of each approach is essential for informed stock market decision-making.
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