FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Fundamental Analysis vs Technical Analysis

Updated on May 23, 2024
Article byNiti Gupta
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Differences Between Fundamental and Technical Analysis 

Fundamental analysis refers to analyzing financial aspects of a business like financial statements and financial ratios and other factors like economics and others affecting the business to analyze the fair market value of its share/security. In contrast, technical analysis refers to the analysis of share/security fair price by examining and analyzing the past trends and changes in the price of shares and studying the business’s historical information.

Fundamental analysis is a stock valuation methodology that evaluates a stock based on its intrinsic value (fair value). On the other hand, technical analysis is a stock valuation methodology that evaluates a stock based on charts and trends and predicts the stock’s future price.

Both methods are used for evaluating the stock and predicting future stock prices. Still, while fundamental analysis focuses on the stock’s intrinsic value, technical analysis focuses on the past trend of the stock’s price movement.

To give you some examples:

Martin Schwartz, a successful wall street trader, gained areputation and wealth due to Technical Analysis. Whereas, Jim Rogers, a popular investor, owes his success to fundamental analysis. Both of them may disagree on many concepts. But they will surely agree that emotional control is the most critical path to follow.

Fundamental Analysis vs Technical Analysis

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Fundamental Analysis vs Technical Analysis (wallstreetmojo.com)

What is Fundamental Analysis?

Fundamental analysis aims to find the enterprise value of the company. It means arriving at its Intrinsic price. This kind of analysis uses Economic factors. These factors prove the fundamental elements to determine the price. So if you are opting for the Fundamental route, be sure to perform the following analysis:

Major Assumptions:

  • In the long run, Stock Price corrects itself.
  • You can make gains by purchasing an under-valued stock and then wait for the market to correct itself.

This investing technique is adopted by buy, hold, and value investors.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

What is Technical Analysis?

It is also a method of evaluating Securities. But the entire game here depends on the statistics generated by the market. So charts and patterns are the Bread and Butter of technical analysis.

So let’s see what the characteristics of technical analysis are:

  • This analysis uses past price movements to predict future price movements.
  • Trends and Patterns play a significant role, rather than the Intrinsic Value.
  • Market Price is everything. Factors affecting it are not considered, like in fundamental analysis.

The Three Golden Rules:

Technical Analysts adhere to these three Golden Rules:

  • First Rule: Prices discount all information available to the public.
  • Second Rule: Price movements are not random. Trends behind the price action can be established by using Technical tools.
  • Third Rule: Price Trends are likely to repeat themselves.

Fundamental vs. Technical Analysis Video Explanation

 
 

Fundamental vs. Technical Analysis Infographics

Let’s see the top differences between Fundamental vs. Technical Analysis.

Fundamental-analysis-vs-technical-analysis-infographics-info

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Fundamental Analysis vs Technical Analysis (wallstreetmojo.com)

Steps to Carry Out Fundamental Analysis

Step 1: Perform Industry Analysis

Industry Analysis

Dig and find out everything about the industry/sector the firm operates.

This type of analysis will give you insights about:

Step 2: Perform Company Analysis

Company Analysis
  • Understand the inside-out operations of the Company using Ratio Analysis. Carry out Horizontal and Vertical Analysis.
  • Evaluate Trends over time. Compute the percentage increase or decrease relative to the base year.
  • Understand where the company has applied its resources. Know the proportions in which they are distributed among various accounts (balance sheet and income statement).
  • The next tool that you must adopt is Ratio Analysis. It will help you understand the changes in the company’s Financial Situation.
  • Note that, Ratios are parameters and not absolute measurements. Hence it must be interpreted cautiously.

Step 3: Perform Financial Modeling

Financial Modeling
  • Forecast the future Financial of the Company (financial modeling) for the next five to seven years.
  • You may require a lot of information and assumptions here.
  • The ultimate goal is to understand how the financial statements and the stock price will look in the future.

Step 4: Carry out Valuation Analysis

Many Valuation techniques are company/industry dependent. For example, in most cases, DCF and Relative Valuation approaches (like PE Multiple, Price to book value ratio, Price to Cash Flow, etc.), SOTP valuation is used. However, you may require other types of approaches based on company type.

Discounted Cash Flow Analysis:
DCF Valuation

In Discounted Cash flow analysis, you arrive at an Intrinsic price. The methods and procedures used for the same are interesting. We are not going to discuss the same in detail in this article. But let’s jump to the step where you arrive at your intrinsic Share Price for the company. So here is how you will interpret your results.

  • If Market Price > Intrinsic Share Price= Stock is Overvalued, the recommendation is to sell the stock.
  • If Market Price < Intrinsic Share Price= Stock is Undervalued, Recommendation here will be to Buy the stock.
Relative Valuation Analysis:
Relative Valuation

This valuation technique makes use of comparable Company Analysis. You value your company of interest by comparing it to its peer group.

Some of the valuation parameters used in this are:

Steps to Carry Out Technical Analysis

Step 1: Identify which Securities interest you!

A little research on which sector is currently trending will help you decide what to buy or sell. However, it is the first and the major step you will take.

Step 2: Identify the best-suited Strategy.

Not all the stocks will fit into the same strategy. Therefore, identifying the best strategy for the selected stocks is essential.

Step 3: Select a Trading Account

You need the right share trading account with the required support, functionality, and cost.

Step 4: Know your Tools & Interfaces

Select those tools that fit your trading requirements and strategies. There are a lot of free tools available. You can try them first to know their features as a novice trader.

Step 5: Always Paper Trade first!

It’s a big world out there. To jump into the Trading Jungle without any prior knowledge is a big mistake. I would suggest you spend a month testing your system with the end-of-day market data. Then, select a few stocks that meet your technical indicators requirements. See how they are doing each day.

Step 6: Set Stop Loss

Holding a losing Trade will dig a deeper hole for you. Set a Stop loss no matter what stock you choose.

Key Differences

  • Fundamental analysis is based on a long-term approach to evaluating the stock and suggests data analysis for several years. This type of approach helps the investors select those stocks for investment whose value is expected to increase in the future. Technical analysis is based on a short-term approach to evaluating the stocks. For this reason, it is more relevant for day traders as the purpose of the analysis is to select those stocks that can be purchased now to be sold at higher prices in a shorter period.
  • Fundamental analysis considers the intrinsic value of a stock for identifying opportunities for long-term investment. The technical analysis evaluates the past price movements of a stock. It predicts how a stock will perform in the future, i.e., whether its price is expected to increase or decrease over a shorter period.
  • The objective of fundamental analysis is investing since it is a long-term approach. However, technical analysis is concerned with trading objectives.
  • Decisions are arrived at in fundamental analysis based on available data and financial statements. On the other hand, decisions are based on charts and price movement trends in technical analysis.
  • Fundamental analysis considers both past and presented data about a stock, whereas technical analysis considers only past data.
  • Fundamental analysis is useful for long-term investors. In contrast, technical analysis is useful for day traders and short-term traders who wish to earn profits by selling the stock over a shorter period.
  • No assumptions are involved in fundamental analysis. In technical analysis, many assumptions are to be taken: price will continue to follow the past trend in the future.
  • Fundamental analysis can help decide whether a stock is overvalued or undervalued based on its intrinsic value. On the contrary, technical analysis helps one decide the correct time to purchase or sell a stock based on price movements.

Fundamental vs. Technical Analysis Comparative Table

Criteria Fundamental Analysis Technical Analysis
Meaning Analysis of stock based on the calculation of its intrinsic value Analysis of stock and prediction of its price by the use of trends and charts about its price movement
Purpose Evaluate the intrinsic value of stock and make a decision regarding investment Analyze the correct time to enter or exit from the market with respect to a stock based on predicted future prices
Relevance Long term investments Short term investments
Function served Investing Trading
Basis of decision Historic and present data Historic data
Source of data Financial statements and the company’s present and past performance Charts and trends
The factor for buying stock When the stock price is less than the intrinsic value When an investor believes that investor can be sold at a higher price in the future
Concepts used Return on equity and return on assets Dow theory, price data
Approach followed Long term Short term
Assumptions No assumptions are taken. Many assumptions are taken, such as a similar price trend will follow

Advantages & Disadvantages

#1 – Fundamental Analysis

Advantages
  • Analytical methods: The methods and approaches used in Fundamental analysis are based on sound financial data. It eliminates the room for personal bias.
  • 360 Degree Focus: Fundamental analysis also considers long-term economic, demographic, technological, and consumer trends.
  • A systematic approach for deducing the Value: The statistical and analytical tools used help arrive at a proper Buy/Sell recommendation.
  • Better Understanding: Rigorous accounting and financial analysis help gauge a better understanding of everything.
Disadvantages
  • Time-consuming: Carrying out Industry analysis, financial modeling, and valuation is not a cup of tea. It can get complicated and may need a lot of hard work.
  • Assumptions centric: Assumptions play a vital role in forecasting the financials. So it is crucial to consider the best and the worst-case scenario. Unexpected negative economic, political, or legislative changes may cause problems.

#2 – Technical Analysis

Advantages
  • Gives insights on volume trends: Demand & Supply govern the trading market. Thus it tells you a lot about Traders’ Sentiments. You can judge how the overall market is working. Usually, High demand pushes up prices, and high supply pushes down prices.
  • Tells you when to enter and exit: Technical analysis can tell you when to enter or exit from the game.
  • Provides current information: Price reflects all the available information about an asset. Prices may increase or decrease, but ultimately the current price is the balancing point for all information.
  • Patterns give you direction: You can use patterns as a guide to direct your buy and sell decisions.
Disadvantages
  • Too many indicators spoil the charts: Too many indicators can produce confusing signals which may affect your analysis.
  • Underlying fundamentals ignored: Technical analysis does not consider the underlying fundamentals of a company. It can prove risky in case of long time frames.

Fundamental vs. Technical Analysis Video

 

Conclusion

Both methodologies are being used by investors around the globe for market-related decisions. However, they are different from each other because while fundamental analysis is based on intrinsic value, technical analysis is based on historical price movements to predict the future prices of stock.

The fundamental analysis places its reliance on all those factors (known as fundamentals) that can influence a stock’s price, such as economic, financial, and other relevant factors. It is based on the thought that though the prices don’t correspond to the effect of fundamentals in the short-term, in the long run, the stock prices will adjust according to the fundamentals.

Technical analysis studies the historical price movement of the stock and is based on the stock market prices rather than the factors that may influence them. It doesn’t consider the stock’s value; instead, it analyses the past trends and predicts future prices accordingly.

Recommended Articles

This article is a guide to Fundamental Analysis vs. Technical Analysis. Here we discuss the top differences between this analysis and the steps to perform the analysis. We also discuss their advantages and disadvantages. You may also have a look at the following articles –

Reader Interactions

Comments

  1. Rashi Jagga says

    Really a helpful article. Thanku for the same.

    • Dheeraj Vaidya says

      Thanks for your kind words!

  2. BabuRajendraprasad T says

    I have read your article and it is very much useful. It is explained very nicely in simple terms. It definitely gave more clarity on fundamental analysis and technical analysis. Thanks for such a great article. I will try to read all your other posts / articles.

    • Dheeraj Vaidya says

      Thanks for your kind words!

  3. Phạm Ngọc Minh Quang says

    that’s nice. thank for sharing your knowledge…

      • JOSEPH ESIVWENUGHWU(ACA) says

        This is one of the best analysis from you in recent time. Keep it up.

        Joseph Esivwenughwu(ACA)

        • Dheeraj Vaidya says

          Thanks for your kind words!

  4. Gautam says

    Hey Dheeraj i purchased the courses ,,,can you tell me where should i start for the financial modelling course ?Being an engineer i have no knowledge in finance but i want to make career as a financial modeler ,please provide me the link from where should i start the course because i have now life time access .

    • Dheeraj says

      Hi Gautam,

      If you are an engineer, you should start with accounting first and then move to financial modeling courses. In addition, you must do a quick refresher of Excel Courses so that you will be all set to learn financial concepts and its applications in excel.

      All the very best,
      Dheeraj

  5. Ahsan Iftikhar Qureshi says

    Very nicely explained.

    • Dheeraj says

      Thanks Ahsan!

  6. Adam Samuels says

    Thanks once again for very informative article on Fundamental Analysis vs technical analysis .I Enjoyed reading it.I am following your articles and reading all since last seven -eight months.I have learnt many thing from you. Thanks Dheeraj

    • Dheeraj says

      thank you Adam! :-)