Fundamental analysis vs Technical analysis

 

 

 

Fundamental analysis and technical analysis are two distinct approaches to evaluating investments, particularly in the stock market. Here's a detailed comparison:

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1. Definition

• Fundamental Analysis:
  Focuses on evaluating the intrinsic value of a stock by analyzing a company’s financial health, business model, industry position, and economic environment.

• Technical Analysis:
  Focuses on price movements and trading volumes, using charts and patterns to predict future stock movements based on historical trends.

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2. Key Factors Analyzed

• Fundamental Analysis:

  • Financial Statements: Profit & loss statement, balance sheet, and cash flow statement.
  • Ratios: P/E ratio, P/B ratio, ROE, ROCE, debt-to-equity ratio, etc.
  • Qualitative Factors: Management quality, competitive advantages, market trends, and economic indicators.

• Technical Analysis:

  • Price Charts: Line charts, candlestick charts, bar charts, etc.
  • Indicators: Moving averages, RSI, MACD, Bollinger Bands, etc.
  • Patterns: Head and shoulders, double tops/bottoms, triangles, etc.

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3. Time Horizon

• Fundamental Analysis:

  • Long-term focus.
  • Suitable for investors who want to hold stocks for years, based on the company’s growth potential.

• Technical Analysis:

  • Short-term focus.
  • Suitable for traders looking to profit from daily or weekly price movements.

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4. Data Sources

• Fundamental Analysis:

  • Annual reports, news about the company, economic data, and industry reports.

• Technical Analysis:

  • Stock price charts and trading volume data from exchanges.

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5. Tools Used

• Fundamental Analysis:

  • Tools like financial ratios, discounted cash flow (DCF) models, and economic analysis.

• Technical Analysis:

  • Charting platforms with built-in indicators and customizable tools like Fibonacci retracements or trend lines.

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6. Who Uses It?

• Fundamental Analysis:

  • Long-term investors, mutual funds, and value investors like Warren Buffett.

• Technical Analysis:

  • Day traders, swing traders, and short-term speculators.

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7. Philosophy

• Fundamental Analysis:
  Believes that the market may misprice a stock in the short term but that the true value will eventually be reflected.

• Technical Analysis:
  Believes that all market information is already reflected in stock prices and trends tend to repeat themselves.

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8. Strengths

• Fundamental Analysis:

  • Provides a deep understanding of the company.
  • Better for long-term wealth creation.

• Technical Analysis:

  • Useful for timing the market and identifying entry/exit points.
  • Works well in volatile markets.

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9. Weaknesses

• Fundamental Analysis:

  • Time-consuming and may not work well for short-term decisions.
  • Relies on assumptions about future growth.

• Technical Analysis:

  • Can give false signals.
  • Doesn’t consider the actual value or financial health of a company.

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Which Should You Use?

• If you’re a long-term investor: Focus on fundamental analysis to select solid companies with growth potential.
• If you’re a trader: Use technical analysis to capitalize on short-term price movements.

Many successful investors and traders combine both approaches for a well-rounded strategy.