Fundamental Vs Technical Analysis – Which one to prefer?
To buy shares in stock market, you need to analyse various parameters. Fundamental and Technical Analysis would help investors and traders in identifying the best stocks suitable for investment. What is Fundamental Analysis means? What is Technical Analysis of a stock? What is the difference between Fundamental and Technical Analysis in a stock valuation? Which analysis should you prefer for identifying stocks for investments?
What is Fundamental Analysis of a stock?
Fundamental Anaylsis is the analysis of financial statements, business assets, liabilities, earnings, health and its competitor analysis. Fundamental analysis relies on financial data. Genetally it is performed on historical and past data. It is done for stock valuation and predict share price, estimate business projections, its management capabilities, internal business decisions and calculate credit risk of the company.
What is Technical Analysis of a stock?
Technical analysis on the other hand is a security analysis methodology for forecasting the direction of share prices through study of past market data, primarily share price and volume.
What is the difference between Fundamental and Technical Analysis?
Now let us try to understand difference between these two parameters which are key in identifying a stock.
1) Concept of analysis
- Fundamental analysis is used more on analyzing figures/nos, profits, balance sheet etc., of the company.
- Technical Analysis on the other hand is more on charts and various tools to analyse how a price of a share is moving.
2) Focus of the analysis
- Fundamental analysis focuses on key ratios like Earnings Per Share (EPS), Price to Earnings Ratio (P/E Ratio), Book Value, Price to book value (PBV), Return on Net Worth (RoNW) etc.,
- Technical analysis on other hand relies on complex charts which focuses on volume and price of the shares.
3) Who should rely what
- Fundamental analysis is more for long term investors as they would analyse various parameters based on which a long term investment decision can be taken. It is for a long term investment strategy.
- On the other hand, Technical Analysis is more for traders who rely in charts of price movements. This is for day trading or for short term investment strategy.
4) Time taken for analysis
- Fundamental analysis takes time to analyse various parameters including profit and loss account, balance sheet and various ratios. It is time consuming task.
- On the other hand, Technical Analysis is quick as it just relies on volume and price movements of the share.
5) Fundamental or Technical Analysis – Which one should you prefer then?
Many investors invest in fundamentally strong company, however may not always make profits out of it. E.g.Tata Steel, where share price has fallen by 45% in last 1 year. The reason is they invest at high price which is technically not broken. You can choose fundamentally strong company and technically upward trend moving stock for investment.
Let me explain with some examples.
Example No.1 – Lupin Ltd
Lupin is a strong pharma company. Currently it is trading at Rs 2,080. In last 1 year, share price has gone up by 52% and in last 30 days it has gone up by 11%. While there are number of ways the technical analysis could be done, considering this simple technique, the price of the stock is expected to move in upward trend in the long term. Considering fundamentally strong along with upward trend in technical analysis, makes this stock attractive.
Example No.2 – Tata Steel Ltd
Tata steel is another fundamentally strong company. Currently trading at Rs 247. In last 1 year, share price has gone down by 46% and in last 30 days, it has gone up by 9%. Considering this simple technique in technical analysis, the price of the stock is expected to be volatile in short to medium term. Though fundamentally strong, but downward trend in technical analysis, makes this stock not that attractive.
Also Read: How to gain from stock market rallies?
Example No.3 – Unitech Ltd
Unitech was earlier fundamentally strong company. However in last few years, it is posting negative revenue growth and incurring losses. All ratios look very weak. It was trading at Rs 6 per share (average) till 1 month back, currently trading at Rs 7.7 per share. In last 1 year, share price has gone down by 56% and in last 30 days, it has gone up by 22%. Though fundamentally weak, but upward trend in technical analysis, makes this stock attractive in short term. However long term trend is still negative.
Note that there are several techniques / tools in doing technical analysis. I just covered high level points in this article. I would be covering a detailed article on technical analysis in coming weeks.
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Fundamental Vs Technical Analysis – Which one should you prefer
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