A great deal of study and analysis goes into trading. The stock market has too many elements and factors to ignore and go in blindly. Especially when there are tools like fundamental analysis and technical analysis to help you gauge the market, it is only a smart move to incorporate them into your stock market investment strategy.

Now, fundamental analysis and technical analysis are two completely different foundational concepts. Each has unique features and insights, making them suitable for specific market players. In this article, we shall explore the definition and working mechanism of fundamental analysis and then compare it to technical analysis to identify the differential aspects. Join us!

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Fundamental Analysis: What Is It?

Fundamental analysis is concerned with analysing the intrinsic or inherent worth of stocks by evaluating different financial and economic fundamentals of the firm. The rationale behind such analysis is to verify whether the stock is fairly priced relative to the general market.

Note that fundamental analysis also considers any macro or microeconomic factor that has an impact on stock prices. In addition to the economic and industrial conditions, the analysts also factor in elements like company management. All these considerations enable a more in- depth analysis.

Fundamental Analysis Indicator

Fundamental analysis involves an array of qualitative and quantitative indicators to evaluate companies and their stocks.

• Qualitative Indicators: business model, corporate governance, management competency, competitive position, intangible assets, business cycles, industry-wide growth, and customer base
• Quantitative Indicators: annual revenue, total profit, accounting ratios, and tangible assets

How Fundamental Analysis Influences Trading Strategy

Fundamental analysis guides investors in making their trading decisions based on a comprehensive understanding of the respective company and holding investments for longer terms. Here’s how investors who rely on fundamental analysis and the principle of buy-and- hold strategise:

• Scenario 1: Fundamental analysis shows that the stock’s intrinsic value is less than the market price, indicating undervaluation. Investors will then buy the undervalued stock with the hope of receiving higher returns in the long term.
• Scenario 2: Fundamental analysis reveals that the stock's intrinsic value is greater than its market value, and thus, the stock is overvalued. Investors have no difficulty in shorting this stock, anticipating a fall in the stock price in the short run.

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How Fundamental Analysis Differ from Technical Analysis

While fundamental analysis works with a broad range of indicators, technical analysis exclusively factors in the historical statistics and data of the respective stock price, returns, and trade volumes. By using past data, technical analysts predict future price movements of the stocks. The expectation here is that all fundamental factors are already incorporated in the stock's price and do not change.

Technical analysts come up with price ranges based on patterns found in the historical performance of the stocks. These ranges are like buying and selling signals, or support and resistance levels. Here’s how findings of technical analysis influence trading decisions:

• The traders purchase the stocks at once when the price is about to reach the lower end of the price range, hoping the price will increase shortly.
• Traders sell at the time when the stock price reaches the higher end of the price range in anticipation that the price will drop after it has reached its peak.

Key Differences between Fundamental Analysis and Technical Analysis

The table below shows a comprehensive differentiation of the two analyses:

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FAQs

1. What are indicators in technical analysis?

Technical analysis indicators include moving averages, moving average convergence divergence, and relative strength indexes, among others.

2. Which analysis should beginners opt for?

For beginner traders, fundamental analysis will be easier to comprehend and provide a broader overview of the company. On the contrary, technical analysis might be a bit more complicated and better suited for experienced traders.

3. Which is better - fundamental or technical analysis?

Both have their merits. Fundamental analysis suits long-term trading because it involves a wider analysis. Technical analysis is better for short-term traders because it takes short-term history.

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