Fundamental Analysis vs Technical Analysis

Analyses of the financial markets are broadly divided between two schools of thought. Those who advocate fundamental analysis and technical analysis.

Fundamental analysis is a method of evaluating the intrinsic value of a company, and hence the share price, by researching and examining the corporate financial statements, the business itself, industry outlook and so on. Conventional wisdom dictates that the price of a stock that is trading for less than its intrinsic value should rise and the price of a stock that is trading for higher than its intrinsic value should fall.

Fundamental analysis assumes that the market has perfect information and investors will act rationally based on the information. In reality, it is observed that these assumptions do not necessarily hold true. However, it is generally accepted that in the long-term, prices will move according to its intrinsic value.

Examples of fundamental analysis are horizontal analysis, ratio analysis and net present value.

Technical analysis is a method of evaluating future price of a stock based on statistical analysis of past behaviors of the stock. Behaviors of stock include trading volume, moving averages, price trends and other types of charts.

Technical analysis assumes that the price chart frequently anticipates news and other fundamental events before they become public knowledge. It is used by market analysts to identify the beginning of an uptrend, entry point, beginning of a downtrend and the exit point.

Examples of technical charts are line charts, bar charts, candlestick charts, moving averages.

Fundamental analysis takes a long-term view of the value of the stock, and this is what the value should be ... in the long-term. Technical analysis however, is more concern with the short-term.

Then there is also a hybrid of the two known as the techno-fundamentalist theory. Nicholas Darvas in his book “How I Made $2,000,000 In The Stock Market”, described how he selected winning stocks by combining his technical analysis with the fundamentals of the companies.

In conclusion, neither fundamental analysis nor technical analysis is more superior than the other. Both have their merits and should be used at the right times.

If you are investing for the long-term, the fundamentals should play a more important role in determining the type of industry and company you choose. The technical side should play a more important role when deciding the entry and exit points of your investments.

If you are a speculator, then all you are concerned with is the short-term, hence the technical charts.