Fundamental Analysis vs. Technical Analysis : The Indian stock market is catching everyone’s eye. The investors and traders have made good wealth in the stock market in the past few years. Therefore, more and more people are taking interest and participating in the share market. In fact, the traders and investors follow different methodologies while investing or trading. There are two methodologies in the stock market; fundamental analysis and technical analysis. Both the methodologies are very different from each other.
In this article, we shall understand the difference between fundamental and technical analysis.
Let us first understand the meaning of each term.
What is meant by Fundamental Analysis?
The fundamental analysis of a stock is done to find out whether the investment in a company is worth the risk or not. In fact, fundamental analysis is all about analysis of the available data of the company. In addition, it involves analyzing the fundamentals of the company, studying the balance sheet, calculation of the intrinsic value of the stock, the future growth prospects and much more. To put it another way, fundamental analysis is all about predicting the future price of a stock on the basis of data, information and news available to the public.
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Now, let us understand the meaning of Technical Analysis.
Meaning of Technical Analysis
Technical analysis is studying the charts of the stock and determining the price movement. Many factors play a critical role in chart formation of a stock. Some of the important factors are trade volumes, the historical price of the share, industrial trend, etc. To put it another way, the stock picking in technical analysis of a stock depends on the price volume action. Therefore, it would not be wrong to say that technical analysis looks for opportunities in picking the stock on the basis of sudden price or volume surge.
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Now, let us have a look at the differences between fundamental analysis and technical analysis of Indian stocks.
Fundamental Analysis vs. Technical Analysis
Fundamental analysis and technical analysis are different not only because they apply different methodologies. In fact, they are different because they are of equal importance for different types of investors in the stock market. Below points shall help you in understanding the differences.
- Fundamental analysis helps in finding the actual price of the company’s stock in the long run. Therefore, it would be right to say that fundamental analysis is significant for long-term investors. On the other hand, technical analysis reads the charts to determine the stock price movement in the short period. Hence, technical analysis is of importance to the traders.
- If the investor is clear about the goal of his investment, the methodology can be selected accordingly. For example, if the investor wants to invest for a short period and later change the stock, he may follow the technical analysis of the stock. Furthermore, if the investor aims to invest in a stock for a longer horizon, he may follow the fundamental analysis of the stock.
- The period of investment is important criteria before selecting any methodology. Technical analysis is done on the basis of charts. They may change in a span of time, While, fundamental analysis is helpful for long-term investment. This is because the fundamentals of the company remain intact for next few years. Therefore, if the right duration is known, the right methodology can be put to use before investing in any stock.
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The above point suggests how fundamental analysis and technical analysis differ from each other. The next question that you may have in your head is which methodology is better. In this segment of the article, we shall have a look at which analysis methodology is good for the investor.
Technical Analysis vs. Fundamental Analysis, Which Is Better?
Both the methodologies are good at their own place. It is not possible to prove the superiority of one methodology over the other. In fact, the use of any of the two methodologies depends upon the time horizon and purpose of investment. To put it another way, if the period of investment is short, technical analysis is the right methodology. Similarly, if the period of investment is long, fundamental analysis is the right methodology.
Now let us learn the implications of efficient market hypothesis for fundamental and technical analysis.
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Implications of Efficient Market Hypothesis for Fundamental and Technical Analysis
Efficient Market Hypothesis (EMH) is an investment theory that says the no one can beat the stock market as the existing market prices incorporate all the information available. In fact, according to EMH theory, the technical analysis uses past data and use of past data cannot outperform the stock market. Similarly, in case of fundamental analysis, EMH states that the information that is available to the public is already in the price of the stock and cannot be used to generate returns. However, in most of the cases, fundamental analysis and technical analysis are correct in picking the right stock for investing money.
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I am Hitendra Dixit. I am a civil engineer, at the age of 47 I have changed my profession and came in to stock market. I got excellence award for best share market training institute in India. I provide training in live market, during training sessions I do trade with real money in front of members. Many of my members left their job and became a professional trader with my support and guidance.