Meaning of Fundamental Analysis
In layman terms, Fundamental analysis is the analysis of a business’s financial health (usually its assets, liabilities, and earnings), of its competitors and of the market in which it functions.
Fundamental analysis includes the following:
- Economic Analysis – Analysis of the economic conditions and trends in income & expenditure of their people. It can be analyzed by macro-economic factors.
- Industry Analysis – Choose the best industry for investment by doing a competitive analysis of the different industries and industry life cycle analysis.
- Company Analysis – To find out whether to buy, hold or sell a share by analyzing financial and non-financial characteristics of the company.
The concept of fundamental analysis is based on the assumption that the share prices of a company based on the future dividend expected by the shareholders. For this, we have to find the present value of future dividends. It can be calculated by discounting the future cash flow with the appropriate discount rate and is known as the “Intrinsic value of the share”.
As per fundamental analysts, the intrinsic value of the share shows what should be the actual/true value of a share. One should buy a share if the price of the share is less than its Intrinsic value and sell a share when it is more.
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Meaning of Technical Analysis
In layman terms, technical analysis is the forecasting of the directional movement of the share price based upon the analysis of the past market data, mainly price, and volume.
Technical Analysis follows the three principles:
- Market Actions discount Everything – It is based on the Efficient Market Hypothesis, which states that a company’s share price already reflects everything that has or could affect a company.
- Price Move in Trends – Technical analysts believe that the share prices follow a trend, that is, they move in a particular direction, either up, down, sideways (stay flat), or any combination of the rest three.
- History tends to Repeat Itself – Technical analysts believe that investors do repeat the behavior of preceded investors. In fact, they believe that behavior repeats itself so often, that, a recognizable price pattern will develop on a chart. To analyze this, a lot of indicators and oscillators are used nowadays.
Inter alia, the following tools, are used to forecast the share price in technical analysis,
- Price trends and Chart Patterns
- Volume and Momentum Indicators
- Oscillators and Moving Averages
- Support and Resistance Level
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Differences b/w Fundamental and
Technical Analysis
| Particulars | Fundamental Analysis | Technical Analysis |
| Basis | Analyzing securities by determining intrinsic value of the stock. | Forecasting the share price on the basis of trends, charts, patterns and indicators. |
| Relevance | Long Term Investments | Short Term Investments |
| Purpose | To identify the intrinsic value of the stock | To identify right time to buy, hold or sell the stock |
| Focuses on | Both Past and Present Data | Past Data Only |
| Type of Traders | Long term Position Traders/ Investors | Short term, Intraday or Swing Traders |