Fundamental analysis and technical analysis are the two main different market analysis techniques. Throughout recent years, investors often debated which is more superior. Unfortunately, it is never simple to answer this question as there is no consensus.
What is Fundamental Analysis
Fundamental analysis is a methodology used in the evaluation of securities such as forex, stocks, and commodities. By examining economic, financial, qualitative and quantitative factors, fundamental analysts attempt to derive the intrinsic value of a security. Many of these factors include the current status of the market, interests rate, industry conditions, management styles, financial conditions, investors’ outlook and the performance of the company. By deriving an intrinsic value, investors can compare it with the current market price; they are able to decide on a course of action based on the intrinsic value (i.e execute a buy if a stock is undervalued and sell or short if the stock is overvalued).
Generally, a fundamental analysis is done by following a few steps:
#1 Economic Forecast
Assess how the current market is faring.
#2 Group/Industry Selection
Evaluate which industries have an advantage given the current market situation. Filter out industries that stand out from the current economic environment.
#3 Narrow within the Group
Determine which companies are doing better than the others within the same industry.
#4 Company Analysis & Financial Analysis
Examine the company’s performance, competitive advantage, and financial health by looking at the business plan, management team’s quality and track record, and financial statements.
Use statistical methods and ratios (e.g. price to book value) to evaluate the intrinsic value against current market value.
#5 Final Evaluation
Using the information gathered from the fundamental analysis process, the investor decides whether to buy, hold or sell his assets.
Read Also: Step-by-step Guide To Picking A Stock
What is Technical Analysis
Unlike fundamental analysts, technical analysts don’t delve into the intrinsic value. Technical analysts are more interested in the price movements in the market. By using past price movements, technical analysts can forecast future performance and price movements.
Technical analysis does not result in absolute results about the future; it helps to tell investors the probability of the prices over a period of time.
What technical analysts do is look at the supply and demand in a market. They are able to determine what is the trend that may continue in the future. They are able to understand the emotions, and trend of the market by looking at the behaviour and activity.
|Fundamental Analysis||Technical Analysis|
|Data Used||Economic reports, news, events, industry statistics, financial statements, key profitability ratios.||Historical price movements.|
|Type of Investor||Long – term investor||Usually short – term day traders|
|Execution Style||Uses intrinsic value derived from fundamental analysis to decide to buy, hold, sell a certain security.||Uses the probability of the price of a certain security to make a profit (e.g. execute a buy order when the probability of a bullish stock is high).|
|Time Horizon||Days, Weeks, Months and Even Years||Most positions are held in brief periods. Some even can take seconds.|
Utilizing The Best of Both Worlds
In the financial market world, fundamental and technical analysis are sitting on the opposite sides of a spectrum. Which is better than the other is always debated, and there are many books written on both of these methods.
We believe that investors should consider incorporating both analysis methods for their personal investments. Fundamental analysis nuld be used to assess the outlook of the company, and technical analysis could be used determine enter or exit timings.
Both fundamental and technical analysis methods are complex in their own right, we urge all investors (especially rookie investors) out there to read up, and get comfortable with both analysis methods. It will help you to capitalize on various tools that will make you a better investor.
Top Image Credit: DollarsAndSense.sg
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