Difference Between Fundamental Analysis And Technical Analysis
Contents
Difference Between Fundamental Analysis And Technical Analysis
Which one is better between fundamental and technical analysis has always been a topic of discussion. Because investors invest in the stock market for higher returns, they buy stocks whose prices are expected to increase more in the future and sell those stocks whose prices are not expected to increase.
Investors also do not like to invest in such stocks whose prices are likely to remain stable. Fundamental and technical analyses are used to identify stocks. In this post, a comparative description of Fundamental analysis vs technical analysis has been given.
There are different methods of technical and fundamental analysis. Both technical and fundamental analysis is also used in commodity, bond, forex, and equity markets.
Fundamental Analysis
Through fundamental analysis, the intrinsic value of its shares is extracted by evaluating the company. In this, the net worth of the company is calculated by looking at all the assets and liabilities of the company.
Then on the basis of this, the price of the company’s share is estimated. Sometimes analysts also see what is the dividend policy of the company.
If the company gives dividend year after year, it means that the company is generating cash, which means that the company is investor friendly. In fundamental analysis, these methods are used to estimate whether the company is worth investing in or not.
The value of shares is estimated by fundamental analysis. Especially about undervalued companies which can do well in the future. Other markets such as commodities and currencies can also be analyzed through fundamental analysis. The following tools are used to do a fundamental analysis of any company –
- (A) The True Value of Stocks
- (B) Earnings
- (C) Profit Margin
- (D) Price To Earnings
- (E) Price To Book
- (F) Price / Earning To Growth (PEG)
- (G) Return To Equity (ROE)
Intrinsic value
Intrinsic value: By analyzing any stock, fundamental analysts estimate its intrinsic value (true value, The true value of stocks) and buy and sell the stock accordingly. Because gradually the market price of the stock moves toward its intrinsic value. Because of this, investors investing in shares earn profits.
Earnings
Earnings: Before investing in any company, investors see its earnings. Because the possibilities of its future growth can be understood only through the earnings of the company. Because this determines the price of the company’s stock in the future.
Profit Margin
Profit margin is the ratio of the profit of the company (after deducting all the expenses). Which is divided by the revenue of the company. Profit margin compares profit from sales. 10% profit means the company is earning ten paise for every rupee of revenue.
Return On Equity (ROE)
Return On Equity (ROE): ROE means the return on equity, the return that is received after deducting the liabilities from the assets of the company. It is called ROE. ROE also measures how much profit is generated for every dollar spent by the shareholder. ROE is a metric that measures how well a company uses its equity to generate returns.
Price-To-Earning Ratio (P / E ratio)
Price-To-Earning Ratio (P / E ratio): To get the company’s P / E ratio, the P / E ratio is calculated by dividing the current share price by its earnings per share (EPS). If the P/E ratio of a company is high, it means that its share price is higher than earnings and the share is overvalued, investment in such shares should be avoided.
Price-To-Book (P/B Ratio)
Price-To-Book (P/B Ratio): In this, the current market price of the company is compared to its book value (the value of all the assets of the company is included under the book value). From the P/B ratio, we can understand that if the company becomes insolvent then what will be its residual value.
Price/Earnings-To-Growth (PEG)
Price/Earnings-To-Growth (PEG): To calculate the PEG ratio, the company’s PEG ratio is calculated by dividing the company’s P/E ratio by its expected twelve-month growth rate. If the PEG ratio of a company is higher than its P/E ratio, then it means that its share is overvalued and if the PEG ratio of a company is less than its PE ratio, then it means that its share is undervalued.
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Technical Analysis
Technical analysis is a methodology by which the direction of the price is estimated. whether the price will go up or down. Through this, the possibilities of trading and investment are discovered. Technical analysis is based on historical trading data, price movement, and volume.
Most of the following indicators are used under technical analysis
- (A) Price trends
- (B) Chart patterns
- (C) Volume and momentum indicators
- (D) Oscillators
- (E) Moving averages
- (F) Support and resistance levels.
Price trends
Price trends: The price trends of stocks can be easily understood through technical analysis. If the stock is making a higher high then it means the stock is in an uptrend and if the stock is making a lower low then it means the stock is in a downtrend.
Chart patterns: A chart pattern is a shape that reflects the previous price chart of a stock. With the help of this, the trader can predict where the share price can go further, and accordingly, the trader can create a position in the share.
Chart Patterns
Chart patterns are graphical representations of the price movements of financial assets such as stocks, currencies, commodities, or cryptocurrencies. They are used by traders and investors to identify potential buying or selling opportunities.
Some common chart patterns include head and shoulders, cup and handle, triangle, and flag and pennant. These patterns can help traders make decisions by providing information on a trend reversal, trend continuation, and price targets. However, it’s important to note that chart patterns are just one of many tools used in technical analysis and are not a guarantee of future market movements.
Volume and momentum indicators
Volume and momentum indicators: Volume indicators tell you how the volume is increasing or decreasing from time to time. Volume indicators are mathematical formulas and are displayed on charts. A different formula is applied to each indicator. The trader should use the best indicators according to him.
Momentum indicators
Momentum indicators are a technical analysis tool that measures the rate of rise and fall of a stock’s price. Some examples of momentum indicators are RSI and MACD.
Oscillators
Oscillators: Oscillators used in technical analysis are also momentum indicators in that stock price movements are tied to upper and lower bands. When the stock price approaches the bands of the oscillators, they give overbought and oversold signals to the traders.
Moving average
Moving average: Moving average is a trend indicator that shows the average closing price of a stock over a period of time. With the help of which trading opportunities in stocks are identified.
Support and Resistance levels
Support and Resistance levels: Support and resistance are predetermined levels in the technical analysis of the stock market. Support & resistance (S & R) are specific points on the chart that are expected to attract most of the buying and selling at these points. This happens too.
Fundamental Analysis Vs Technical Analysis
The most important is value and price. Because in fundamental analysis the value of the company is considered and the value of the company depends on the value of its assets and its profits. While investing in a company, fundamental analysts give a lot of importance to the value of its stock and its current market price.
In technical analysis, the future price of a stock is estimated by looking at its chart. Chart patterns often repeat themselves because traders tend to behave the same way in similar situations. Technical analysis is based on price and data.
During fundamental analysis, long-term investment is done by studying the balance sheet of the company. Is. In technical analysis, trading is done for the short term by studying the demand and supply of the stock on the chart.
Only the people who use them can decide which is better in both because everyone has their own preferences and needs. By the way, fundamental analysis is considered good for investing and technical analysis for trading.
Conclusion
If you are new to the stock market, then it is very important for you to have such basic knowledge. If you want to earn money from trading or investment, then it is very important to have knowledge of fundamental and technical analysis. After being technical analysts or fundamental analyst you can get best return.
