Fundamental and technical analyses are mainly the two broad types of analysis used worldwide. These concepts help investors to make an informed investment decision. It helps investors to take a call whether to buy, hold or sell an asset, which could be a share or commodity or any type of asset traded in a regulated market.
Fundamental analysis is an approach towards stock selection based on economy, industry, and company. With this approach, an investor can identify the intrinsic value or true worth of a share. Accordingly, if the current market price of the asset is less than the intrinsic value or true worth, one should buy the shares of the company and vice versa.
One of the major assumptions of fundamental analysis that the price in the stock market does not fully reflect a share’s real value due to information asymmetry, which gives investors a chance to make money. To become a fundamental analyst, one needs to have a good understanding of basic economics and also, understand the business model especially with respect to the industry in which it operates. In addition to this, one must also understand the basic financial statements especially how the cash flow is generated for the business and other factors such as ratio analysis, future outlook, etc.
Technical analysis, on the other hand, derives the value, solely from price and volume data generated from the market, which at times can create false signals leading to heavy losses. However, the fundamental equity approach arrives at the intrinsic value differently by predicting security price movements, by analysing various economic, industry & company data and incorporates data that are external to the market. A key distinction between technical analysis and fundamental analysis is that the former uses more concrete & actual data, primarily price and volume data while the latter are not objective data but are the result of numerous estimates as well as assumptions that have been added together to arrive at the line items in the financial statements.
For a person, who wishes to create wealth, fundamental analysis is the most important part of his research. Technical analysis is suitable for those who like to trade securities and are mainly interested in swing trading. It requires more risk appetite than fundamental analysis.