Fundamental Analysis vs. Technical Analysis

Imagine you have some extra savings and are thinking about investing in the stock market. Whenever you open your trading app, you see hundreds of stocks moving up and down every second. 

In this blog, we will discuss some of the concepts using real-life examples and understand how fundamental analysis differs from technical analysis.

Quick summary

Fundamental analysis uses reports, profit, and economic conditions to determine the value of a company. It is useful for long-term investments. 

Technical analysis looks at past price trends and charts with indicators like the RSI to determine price trends. Overall, it is used for short-term trading.

Fundamental focuses on financial health and technical analysis of market trends and patterns. Aimed at increasing the ability to invest.

Our Focus in the Article

• Quick Difference between Fundamental Analysis & Technical Analysis 

• Describe the main tools and respective horizons of analysis.

• Explains the method and technique of these analyses 

• Advantages and Limitations

What is Fundamental Analysis?

Fundamental analysis is the process of examining the true worth (intrinsic value) of a company. 

This analysis attempts to determine whether a company is sound, making a profit, and growing. Think of it as the equivalent of a health check-up for a business.

What does it look at?

• Financial statements (like profit & loss accounts, balance sheets)

• Company’s earnings, sales, and growth plans

• Industry position and competition

• Economic factors (GDP growth, inflation)

• Management quality and business vision

Main Tools of Fundamental Analysis

When investors perform a fundamental analysis of stocks, they aim to measure the actual strength and potential of a company. 

This includes evaluating its financial performance, market share, and prospects to decide if the stock is a worthwhile investment.

The following serves as a straightforward and organized description of the main fundamental analysis tools-financial statements, economic indicators, interest rates, news & events, and qualitative information-while touching upon all relevant points.

Financial statements

The foundation of the basic analysis is financial statements, which give a picture of the financial performance of the company.

1. Balance Sheet:

Discloses what the company is known to own (assets), what is due (liabilities), and its net worth (equity). The most important indicators are cash reserves, debt, and working capital.

Whether it is low balance sheet debt and cash, a good balance sheet reflects financial stability.

2. Income Statement:

Reports income, expenditure, and gain during a time period. Such significant values are growth in revenues, net earnings, and profit margins.

3. Cash Flow Statement:

Records cash receipts and payments of operations, investing, and financing.

Positive cash flow upholds the sustainability of the operations of the company, while it can invest in growth without over-borrowing.

Compare Companies using ratios such as Price to Earnings (P/E), Debt to Equity, and Return on Equity (ROE). An example of this is that a low P/E may represent an undervalued stock.

Economic Indicators

Economic indicators are indicative of the overall economic climate of a business.

1. GDP Growth:

Quantifies economic growth or decline. Good increases in the GDP contribute to the revenue of businesses.

2. Inflation:

A price increase may raise costs or decrease consumer buying power, which affects profit.

3. Unemployment Rates:

Minimal unemployment enhances consumer expenditure, which helps companies within the retail or consumer goods sector.

Examine the impact of the economic trends on the industry. An example of this is that when inflation is high, consumer discretionary businesses will suffer, whereas commodity producers will win.

Interest rates

Central banks use interest rates to determine the cost of borrowing and make investment decisions.

1. Impact on Companies:

The increase in interest rates leads to higher borrowing expenses, and this reduces the ability of companies with heavy debts. Reduced interest rates mean that borrowing is cheaper, which prompts growth.

2. Impact on Stocks:

An increase in interest rates usually decreases the value of stocks, especially growth stocks, because future cash flows are discounted at a higher rate. 

In share market fundamental analysis, this factor is considered important since it directly impacts how investors value a company’s long-term potential.

3. How to use:

Keep track of central bank policies (e.g., Federal Reserve or RBI) and determine the impact of rate changes on the company sector. An example includes greater lending margins in banks as the rates increase.

News and events

News and events could cause a drastic effect on the stock price and outlook of a company.

News About the Company: Contains earnings reports, product launches, or manager changes.

Unexpected positive earnings will increase stocks, whereas scandals will decrease stock prices.

Industry/ Market Events: Industry changes include regulatory changes or technological events, which may impact whole industries.

How to apply: Keep informed through credible channels (i.e., financial news, company announcements).

Determine whether the news is short-term (e.g., a product recall done once) or long-term (e.g., new regulations).

Qualitative information

Qualitative factors evaluate the non-numeric factors of the potential of a company.

1. Quality of Management: The management is well-experienced, and the decisions have proven to be good, which adds confidence.

2. Brand Strength: The strong brand (e.g., Apple) generates customer loyalty and pricing power.

3. Competitive Advantage: Special assets such as patents or dominance on the market, or novelty (e.g., the technology of Tesla) serve as a shield against the competition.

4. Industry Modifications: Companies in such areas can be boosted by development in industries such as renewable energy or AI.

5. Application: Find out the leadership of the company, its status in the market, and the trends in the industry, either by conducting an annual report, interviewing, or analyzing the industry.

Much of the time, this is a good investment in a firm that has a high rate of competitive advantage in an increasing industry.

What Is Technical Analysis?

Instead of looking at a company’s fundamentals, technical analysis of stocks examines past price data and trading activity.  The goal is to use chart patterns and technical indicators to forecast how stock prices might behave next.

Main Tools of Technical Analysis

Technical analysis is a trading and investment tool that analysts use to decide future price movements of a stock, commodity, or any other asset based on historical market data, which is mostly price and volume data. 

It is similar to a study of a map of a stock price movement to make predictions about its future movement. 

I will discuss below the key instruments of technical analysis, in simple terms, and give an example of each as applied to the Indian market.

1. Technical analysis indicators

The mathematical calculations are based on stock prices and volume to determine the trends or predict future movements. 

Indicators guide traders to know when a stock is overbought, oversold, or might change direction.

Widely used ones are Moving Averages, MACD (Moving Average Convergence Divergence), and RSI (Relative Strength Index).

The Simple Moving Average (SMA) is a commonly used indicator. To give an example, say you were analyzing Reliance Industries Ltd. (RIL) on the NSE, you could use a 50-day SMA (average price over 50 days).

2. Volume Analysis

During a price rise, high volume is a good indicator of strong purchasing power, whereas low volume may be an indicator of poor momentum.

Volume analysis can be used to ascertain whether a price movement is important or merely noise.

Among the basic examples, the following can be taken: Tata Motors' stock price has shot up 5 percent in a day on the BSE, and trading volume is 10 million shares as compared to its usual volume of 2 million. 

This large volume is an indication that there has been strong price activity, and more investors are purchasing, and the trend could go up.

3. Relative strength

Relative Strength compares the performance of a stock to either an index (such as Nifty 50) or against another stock. It indicates whether a stock is performing better than the market or worse than the market. 

The stock with the high relative strength is stronger than others, which means that further gains can be expected.

4. Chart Pattern Analysis

Patterns in charts are the forms that the price fluctuations of a stock take on a graph, which would suggest how the stock may move in the future.

Patterns that are generally used are Head and Shoulders, Double Top, or Triangles. The patterns assist traders in knowing the direction the prices will take, which is either an increase, a decrease, or stagnation.

Infosys stock at the NSE may enter into a Double Bottom pattern in 2025, which appears as a W in the chart. This trend usually indicates a decline and an increase. When Infosys hits 1800 twice, people may think that the price will increase to 2000.

5. Candlestick pattern analysis:

Candlestick charts display the opening, closing, high, and low prices of a stock in a given period. 

Some candlestick patterns, such as Doji, Hammer, or Engulfing patterns, provide insight into whether the stock may turn or proceed with the trend.

In the case of Adani Enterprises, we will suppose that on a daily chart, there is a Bullish Engulfing pattern in September 2025. 

This occurs when a small red (bearish) candle is succeeded by a larger green (bullish) one, which seems to engulf it.

This indicates that buyers are becoming the bosses, and the stock value could increase by a margin of say 3200 to 3400.

6. Support and Resistance

The point at which a stock can halt its decline is called support, and the point at which the stock can hardly move is a price level that is known as resistance. These levels are floors and ceilings to the stock price.

7. Trend Analysis

Trend analysis helps discover the overall direction of a stock price, whether it's moving up (Rising), moving down (falling), or moving sideways (having no clear direction). 

Traders often refer to trendlines, which are either drawn by hand or automatically by charting software and connect highs or lows (or both) on a given chart to help with recognizing trends and eventually determine whether to buy or sell.

What is Time Horizon in Investing and Trading?

The simplest way to think of a time horizon is "how long you intend to keep your investment or trade." For example, you can either plant a seed (long wait) or pick an apple (short wait). 

Analysis takes on different shapes for different time horizons because you will be examining the market from different viewpoints. Let's simply explore this.

Long-term & Medium-term Focus of Fundamental Analysis

Fundamental analysis is similar to determining a company's "health report card," by looking at its profitability, growth initiatives, management, and overall business strength.

• It will take time to see the result of these factors, so this is ideal for long-term investors, who can allow time for results.

• Long-term (1–5+ years): You are betting on the success of the company into the future, which is similar to a seed to a tree.

• Medium-term (6 months per year): You are expecting and observing steady improvement of a tree's annual growth seasonally.

Short-term focus of Technical Analysis

Technical analysis is the study of price and volume tendencies of a stock based on its charts, and is akin to reading its mood swings. 

• It is not about waiting, but taking fast action, since in the price of prices in the short term, it is emotions, news, and trends, not underlying company well-being.

• Day Trading (hours or same day): Sell high in the evening, buy low in the morning--as you take a quick bite.

• Swing Trading (several days to several weeks): Trade on a temporary spurt (short-term) of the price movement, then sell.

Comparison: Fundamental vs. Technical Analysis

The major differences and similarities between Fundamental and technical analysis. It puts the contents in a clear context of an analysis of these two fundamental investment strategies.

Which Approach is Better for Different Investors?

Working and stocking are some of the methods that people attempt to earn money by selling and buying items such as stocks, which are tiny portions of companies.

There are various kinds of investors and traders with varying objectives and modes of operation. 

1. Long-term Investor

These are individuals who purchase stocks or other investments and hold them over a long period, such as years or even decades. They desire their money to increase gradually and steadily.

• Reduced stress: They do not have to look at prices daily. They feel that the company is bound to expand in the long term.

• Slower growth: They grab years of gains and evade the minor variations in prices, and hope to get huge profits.

• Savings time: They do not have to trade frequently, which makes it easier to control.

Individuals who desire to save towards big objectives, such as college or retirement, and are not big risk takers.

2. Short-term Traders

These traders purchase and sell stocks, usually within the span of a few weeks or months. They attempt to exploit price fluctuations that happen within a short time.

Faster profits: 

Speculators can earn money at a quicker rate than long-term investors, but only when prices move to their advantage.

More choices: 

They might diversify among different stocks or investments in search of greater opportunities.

Still manageable: 

This trading style is not as fast-paced as day trading, hence allotting the speculator ample time to think about his or her moves.

People willing to enjoy some action, watch the market, and embrace a little risk.

3. Day Traders

Day traders engage in buying and selling stocks on the same day. They refrain from holding any stocks overnight. This approach is mainly aimed at making small profits from small price movements.

• Quick results: They know by the end of the day if they have made or lost money.

• Exciting: Fast and almost game-like, but excruciatingly risky. 

• No worrying about the overnight: Because all their stocks are sold before the market closes, they don't have to worry at all about what could go on at night.

4. Swing Traders

Swing traders buy stocks for a few days or weeks, aiming to capture “swings” or larger price moves during that time period.

Why it’s good for them:

• Balanced approach: It’s not as slow as long-term investing or as fast as day trading, so it’s a middling way of doing things.

• Good profits: Since they target larger price changes than day traders, their profits can be higher.

• Flexible: They trade when they have time, without having to watch the market every minute.

Advantages and Disadvantages of Fundamental and Technical Analysis

Fundamental and technical analyses are two primary methods used to evaluate investments. Let’s understand in tabular form the advantages and disadvantages of various parameters that are beneficial for the stock market 

Fundamental Analysis

Technical Analysis

Limitations and Challenges in Fundamental and Technical Analysis

To better understand stock market investment. Some of the limitations and challenges come during the analysis. Let’s discuss various parameters in Fundamental and technical analysis. 

Fundamental Analysis

Technical Analysis

Conclusion

Finally, a basic analysis touches the innermost part of a firm to make intelligent long-term selections, whereas technical analysis identifies a short-term trend on a chart. 

Both are useful in winning a battle in investing; however, a combination is the most effective. Want easy insights? Today, try Dhanarthi - an AI application that makes reports and analysis easy for beginners! 

It is time to begin your money game with Dhanarthi and build your fortune. 

Disclaimer: This article is for educational purposes only and should not be considered as investment advice. Always consult with a financial advisor before making investment decisions.

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