Fundamental Vs Technical Analysis

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  • October 13, 2021
Fundamental Vs Technical Analysis

When it comes to investing in the share market, one can never be too careful. The Indian share market is quite sensitive and volatile, making it lucrative if you time it right! But, who has ever timed it right? No one in any corner of the world can say they figured out the stock market. 

So, what can one get?

Perhaps, just a logical explanation of what could happen next. Depending upon your investment horizon, you could be hopeful that your investments work out in the long run or the short run. 

This is the major difference between fundamental analysis and technical analysis

When you are looking to invest in the longer run, you do fundamental analysis. However, for those who are into trading, be it intraday or within a couple of days, you are looking at more technical aspects. 

However, let us not rush things. We are going to help you understand the difference between fundamental and technical analysis. 

Here are some definitions.

Fundamental analysis:

As the name suggests, when you analyze an equity fundamentally, the focus is on the brand underneath. The company whose shares you have bought needs to have sound financials, low debt, high revenue, compliance, performance, and an overall solid market presence. The idea here is to put the money on the driver and not the car. 

 Technical analysis:

Contrary to fundamental analysis, technical analysis doesn’t bother itself with the company. It looks at the share’s buying and selling volumes, prices, charts, and near-term indices to make a call. The money here is on the car because if it’s a small race, the driver won’t have much of a say. 

In fundamental analysis, we look at the real drivers behind the share. In technical analysis, we just don’t care. We keep the focus on the stock itself. 

Technical Analysis Vs Fundamental Analysis

When we look at the difference between fundamental and technical analysis, we come across the following points: 

Parameters Technical analysis Fundamental analysis
Purpose  Used to understand the current volumes and trends Used to understand a company’s future prospect and likelihood to give returns with respect to investments, particularly for equities.
Time frame Short-term trading Long-term investment, mostly
Decisions based on Momentum support and resistance levels, pattern, trend lines, and moving averages Present and future valuation
When to buy and sell Expected positive activity in the short-range Quality equity is undervalued
What to look for  Stock charts, share history Company’s financials and plans

A Simple Moving Average (SMA) is possibly a meeting point for both fundamental and technical analysis. How? Let us explain. Ideally, SMA would be a technical indicator since it helps you understand whether a share is undervalued or overvalued at the current moment. It also points out whether there is a possibility for a reversal trend. It takes into consideration the share’s price during a period and derives an average. 

How this information also helps fundamental analysts is that we do not want to invest equity that is expensive, irrespective of the range it will be held for. 

The idea in long-term investments would be to buy cheap and sell expensive. So, while they are okay with investing in an organization, they would still have to time it right. Using the SM indicator, they too can tell if they should wait or plunge in straight off. 

Can they co-exist?

The question often arises: Do technical and fundamental analysis coexist? SMA is a clear point in favor. It doesn’t have to be “fundamental or technical analysis”, it can be both. Rather, long-term investors use technical indicators to perfect their entry into equity. Share traders also use fundamentals to understand whether a sector is profitable to venture into right now. 

For instance, in the case of seasonal picks, it is advised to enter before the season begins and exit before the season ends. If you were dealing with an icebox manufacturer’s share, there would be no point venturing in winters for a span of two months. It would be more profitable to enter when the summer is just around the corner. This analysis was fundamental. 

Conclusion

So, it is clear that fundamental and technical analysis both have their own merits and fandoms. Technical analysis vs fundamental analysis is not a battle, rather a comprehensive agreement on where to use which tool. 

A primary difference between fundamental analysis and technical analysis remains the longevity of the shareholding. It is found that technical analytics are more useful for a short-term investment or more like trading. It is also found that fundamental analytics have indicators more suited for long-term investments. 

However, despite the difference in technical analysis vs fundamental analysis, it is usually found that savvy investors use both, irrespective of the horizon of their investments. Another difference between fundamental analysis and technical analysis is the usage of mathematics. Technical analysis is more so loaded with formulae and calculations. 

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