Understanding Technical Vs. Fundamental Analysis of Stocks

Understanding Technical Vs. Fundamental Analysis of Stocks

Investors can use technical analysis or fundamental analysis when choosing money and stocks from the share market. Each approach pursues a different path in its strategies. This article covers the key differences between technical and fundamental analysis of stocks.

Comparing Technical and Fundamental Analysis of Stocks

Investors can leverage both technical and fundamental analysis to determine the attractiveness of a stock investment. They can also use the concepts to predict future stock trends. For instance, suppose an investor analyzes stocks and wants to determine the ideal entry position; they can use technical or fundamental analysis.

Fundamental analysis measures a company’s performance compared to the economy and its competitors. It analyzes all the components related to the firm like the management, financial ratios, products, competitors, industry, and business model.

Technical analysis does not focus on the stock’s fundamentals or financials. Instead, it analyzes the company depending on past trends, price action, volumes, and share price. Technical analysts leverage stock price charts to spot future patterns and trends.

Understanding a Company’s Intrinsic Value

Some of the assumptions of fundamental analysis include: the prevailing price from the stock market hardly reflects the company’s value supported by available data and that the reflected value from the organization’s fundamental data could be closer to the actual stock value.

Often, analysts say this actual theoretical value is the intrinsic value. Worth noting is that the use of intrinsic value, in this case, differs in terms of stock valuation from its real meaning in other conditions like trading. Option pricing utilizes a basic intrinsic value calculation. Yet, analysts utilize different complex models to secure their stock’s intrinsic value.

·         No one Fits All Formula

There is no universal formula for calculating a stock’s intrinsic value. For instance, suppose an organization’s stock traded at $20, and after a comprehensive evaluation, one analyst finds it worth $24 while another caps it at $26.

Some investors will choose the average of those estimates and consider the company’s intrinsic value to be $25. According to investors, such estimates present relevant data because they strive to purchase stocks trading at lower prices than the intrinsic value.

Such factors trigger another critical fundamental analysis assumption that, in the long haul, the stock market will illustrate the fundamentals. However, a problem arises, seeing that no one understands the duration of the long haul, which could often take days, weeks, or even years. Fundamental analysis is a long-term technique.

By concentrating on a specific business, investors can evaluate a company’s intrinsic value and identify opportunities to buy at reduced prices. The investment will then pay off once the market matches the fundamentals.

Objections of Fundamental Analysis

The most significant fundamental analysis objections emanate from the supporters of the efficient market hypothesis and the advocates of technical analysis. Here is an overview of both approaches.

·         Technical Analysis

Technical analysis is an alternative method of security analysis. Technical analysts trade based on the movement volumes of stocks and the price. They leverage various tools and charts to trade on momentum while ignoring fundamentals.

One of the basic principles of technical analysis is that traders will enjoy various discounts in the market. News about a company is included in the stock price. As a result, the stock’s price fluctuation provides more insight than the underlying business fundamentals.

·        The Efficient Market Hypothesis

Advocates of the EMH (efficient market hypothesis) usually disagree with both technical and fundamental analysts. The EMH maintains that beating the market through technical or fundamental analysis is impossible.

The market prices stocks consistently. As a result, the numerous participants in the market eliminate any chances of excess returns, meaning that no one can surpass the market in the long term.

Comparing technical and Fundamental Analysis of Stocks

How does technical analysis compare to fundamental analysis? Find out some of the popular ways below.

·         Basic Concept

Fundamental analysis focuses on every factor that can impact a company’s stock price, like the industry, management, and financials. It analyzes the company’s intrinsic value to determine whether the stock is underpriced or overpriced. On the other hand, technical analysis focuses on the stock’s past charts, trends, and patterns.

·         Data sources

Fundamental analysis collects data from annual reports, financial statements, and other primary economic news sources and company announcements. Technical analysis collects data from stock charts.

·         Time Frame

While fundamental analysis is ideal for long-term investments, intraday traders often use technical analysis in short-term investments.


Technical and fundamental analysis of stocks is effective. However, there are different methodologies traders can use to earn from the stock market. Determining which among the two concepts is more superior can be a difficult task.

While numerous books have been written and research has been done, experts are still trying to determine the best technique for investing. As an investor, research widely and choose your investing strategy based on your time frame, preference, and knowledge.