Fundamental Analysis vs. Technical Analysis

We commonly use two techniques to forecast prices in the stock market: Fundamental Analysis & Technical Analysis.

The technical analysis forecasts the direction of prices through the study of past stock market data of price and volume. The fundamental analysis determines the intrinsic or true value of the shares in the stock market.

We define intrinsic value of a stock as the “price for the stock based solely on factors inside the company.”

If the intrinsic value is higher than the market price, it is recommended to buy the stocks. If it is equal to the market price, hold the stocks. But if it is less than the market price, sell the stocks.

Types of Fundamental Analysis

The fundamental analysis consists of four types of analysis:

  • Economic Analysis,
  • Industry Analysis,
  • Company Analysis, &
  • CEO/Top Management Analysis.

Successful stock trading depends on:

  1. Conceptual ability of the stock trader to predict prices accurately, &
  2. Practical ingenuity of the stock trader to manage risks efficiently.

Investors can use these different – but to some extent complementary – methods for stock trading.

For example, a fundamental investor may use technical arguments for deciding entry and exit points. A technical investor can use fundamental arguments to limit their universe of possible stock to ‘well-performing’ companies.

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