Technical and fundamental analysis are two of the main schools when it comes to trading and investing. These two kinds of analysis give different benefits to the investors or traders who use them. They also have different assumptions about the market, but you may still use them both on your preference.
Technical analysis looks at the security’s price movement and then uses such data to predict the future movement of prices. Meanwhile, fundamental analysis focuses on the economic and financial factors that may influence a business.
Aside from those, the two approaches have many other differences. Let’s take a look at them.
Tools
For those who use technical analysis, charts are very helpful. On the other hand, fundamental analysts use a company’s financial statements.
Fundamental analysts attempt to find the company’s true value by poring over its income statement, cash flow statement, and balance sheet. The actual value of a company is more commonly referred to as its intrinsic value, which the fundamental analyst tries to reach by discounting the value of future projected cash flows to its net present value. The stock that has price well below its intrinsic value is considered underprice, which means it’s a good investment.
On the flip side, technical analysts believe that there’s really no reason to analyze a company’s financial statements. This is because the stock price already includes all relevant information. Rather, the analyst focuses on the interpretation and analysis of the chart itself for clues into the future path of the price.
Time Horizon
In general, fundamental analysis has a longer-term approach to investing when compared to the time horizon adapted by technical analysis. Stock charts can be limited in weeks, days, or even minutes. Meanwhile, fundamental analysis often considers data that has been gathered over multiple quarters or years.
Investors inclined to do fundamental analysis often wait a long time before a company’s intrinsic values are reflected in the market. For instance, value investors believe that the market is mispricing a security over the short term but the stock price will correct itself over the long run.
Fundamental analysts also depend on financial statements that are filed quarterly and the earnings per share that they don’t see on a daily basis like the price and volume information. The company needs time to implement sweeping changes, create new products, come up with new marketing campaigns, and improve the business.
In other words, one of the reasons why fundamental analysts have longer time horizon is because the data they need to perform their analysis come much more slowly than the price and volume, which required by technical analysts.
Trading vs. Investing
Technical and fundamental analysts have different goals in mind. Technical analysts try to determine short to medium term trades where they get the chance to flip a stock. On the other hand, fundamental analysts try to make long term investments in a stock’s underlying business.
In other words, one is trying to purchase good assets to reap benefits shortly after, while the other purchases an asset with the purpose to wait for it appreciate in value.
