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Fundamental Analysis vs. Technical Analysis

Fundamental analysis is a strategy of analyzing a stock investment or any security by determining its intrinsic value. A very important ingredient to this is to look at a company’s financial condition. Other aspect like management, industry trend, and overall condition of the economy are also taken into account. The main objective is to estimate a certain value for a company that can be used as a basis for decision. If the data and information point to a higher value than what is currently being shown in the market, the current pricing of the stock is deemed as undervalued. In other words, there is a room for growth in its value which investors can gain from. A buy is therefore signaled. On the contrary, if the value is lower relative to the current short-term pricing. The company is deemed overvalued, in which the price will tend to decline in the long-term as it tries to correct itself downward.

On the other hand, technical analysis does not look into the value of a stock as a primary motive for buying or selling stock. It entails studying the trend and momentum in a stock’s price and volume. Based on the trend, traders can determine when to buy or when to sell shares of that stock. Technical analysis mainly use a chart, that is why they are also called chartists, and they do not usually consult the financial conditions of the companies


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Time horizon

Investment time horizon often dictates when technical or fundamental analysis makes sense. Since at point of inflection it appears that technical and fundamentals are often out sync, investment time horizon often comes into play. It is generally believed that short-term investors follow technical while long-term investors are willing to withstand the day-to-day “blips” and follow fundamentals. For example, if you believe that genetically modified seeds are the future of farming, than you will probably invest in a relevant

The bottom line

Sometimes investors like to pigeon-hole themselves into one type of investment style, but being open to combining styles may provide the best opportunity to make most profit. Technical and fundamental analyses do not have to be used alone but can be used together to draw a complete investment picture.

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