Updated: May 30
Author: Federica Iorio
Date of Publication: 07/05/2023
Fundamental and technical analysis are methods that investors usually use to analyze the benefits and risks of long-term investments in the stock market. Which is the best, between fundamental or technical analysis has always been a topic of discussion. Therefore, in this article we give a comparative description of fundamental analysis and technical analysis. The aim is to clarify the concept for all traders or would-be traders. This way they will better know when it is appropriate to use one or the other methodology.
What is Fundamental Analysis?
Fundamental analysis is a method of evaluation of each element. This is what a company or a stock makes up in order to ascertain its intrinsic value. Thus, it considers the financial and managerial situation of the company. For example, it does so with tangible assets that are reviewed in combination with intangible assets.
This method is generally used by long-term investment as it enables you to understand the price that the stock should reach.
The tools below contribute to a fundamental analysis of any company:
The True Value of Stocks
Price To Earnings
Price To Book
Price / Earning To Growth (PEG)
Return To Equity (ROE)
Therefore, fundamental analysis consists of three stages, including:
The economy: to examine the nation's overall economic situation and standing.
The Industry: to ascertain the prospects of distinct industry classifications.
The Company: to determine whether to purchase, sell, or hold the company's shares.
What is Technical Analysis?
Technical Analysis is the process of evaluating securities through statistics. Through this methodology the direction of the price is estimated, whether the price will go up or down.
In particular, technical analysis is based on stock price charts and volume data, using previous price history. This way, it predicts future price movements of a stock.
Most of the following indicators are used under technical analysis:
Volume and momentum indicators
Support and resistance levels.
Investors tend to use this method more in short-term trading, because of the short duration of data collection in technical analysis. However, using technical analysis combined with fundamental analysis can be a powerful tool. This is because it can evaluate long-term investments.
Difference Between Fundamental Analysis And Technical Analysis
Fundamental analysis allows you to select the best investment opportunities relative to market prices. Specifically, it does so by identifying undervalued or overvalued stocks. On the other hand, technical analysis helps you to choose the best timing for investing.
Fundamental analysis is most often used when determining the quality of long-term investments in a wide array of securities and markets. Technical analysis, though, is used more in the review of short-term investment decisions such as the active trading of stocks.
More to the point, in a fundamental analysis, an investor will buy an asset when its market price is below its intrinsic value. In technical analysis the stock is bought by the traders, when they expect that it can be sold at a relatively higher price. However, many professional traders don’t like the mix of analysis.
In spite of this, we can say that the combination of both definitely benefits both analyses: the best thing to do is to trade both following technical and macroeconomic signals. If you want to earn money from trading or investment, then it is very important to have knowledge of both fundamental and technical analysis.