The stock market consists of two types of participants.
1. Long term investor – Analyse the external factors such as economy, management , strength and opportunities within a company become a shareholder of a company for a long time
They are using the valuation ratios to predict the price of a company
2. Trader – Analyse internal factors such as price , volume , pattern, support &Resistance.
They use pattern and trends recognition to predict the prices
But which one is best to get a high return from the market? One should learn technical tools and indicators to trade in a market or deepen their knowledge to do a fundamental analysis of a company for a long term investment.
To be frank, both are best but require discipline to follow the technique and strategy to enter and exit to market.
My purpose here is to make you better understand both techniques to decide which one is best suited for your nature. Their principle is the same to buy at low and sell at high but they can differentiate on various factors:-
1. Main focus -Fundamental analysis main focus is to find the true value of a share whereas technical the analysis focuses more to find the behaviour of price.
2. Source of Information– Fundamental analysis requires information about every action of management, company performance and government policies due to which they are dependent on news and financial statements of companies whereas technical analysis predicts the prices by seeing the charts with respect to the proven historical pattern
3. Prediction vs Reaction -Fundamental analysis is more about the prediction of the market and technical analysis is more about the reaction in the market
4. Market type – Fundamental analysis is conversant with the specifics of each stock or market whereas technical analysis is applicable across all markets, instruments, and timeframes, where price patterns, oscillators, and overlay indicators are all treated in exactly the same manner. No new learning is required in order to trade new markets or timeframes.
5. Entry and Exit levels– Fundamental analysis does not provide the exact price or time of entry or exit whereas Technical analysis provides timely and precise entry and exit price levels.
6. Time Frame for returns– Fundamental analysis mainly concentrates on the long term returns whereas technical analysis results in short term returns.
7. Data representation – Technical analysis provides a clear visual representation of the behaviour of the markets, unlike in fundamental analysis where most of the data is in numerical form.
8. Belief system– Technical analysts believe all important information about a stock is reflected in its price movement whereas Fundamental analysts believe to study company fundamentals is the only way to know the company’s real value or intrinsic value which gives the clear indication that the stock is overvalued or undervalued.
9. Primary Tools – Financial statements and ratios are primary tools of Fundamental analysts whereas technical analyst uses chart patterns such as Head and Shoulder, cup with a handle and technical indicators such as CCI, moving averages etc.
Both have their own pros and cons but big blunder happens when fundamental analyst seeing the movement of price and technical analyst wait long for the price movement.
Fundamental anlysis is for investor and not require to engage full time long whereas
techncal analysis is a full time job.