Fundamental and technical analyses are the two common strategies, used in Nepal as well as all over the globe, to trade on stocks. These two approaches vary in principle from one another and this article aims to explain the two approaches. Both, fundamental as well as technical analyses are used to make investment decisions regarding a particular stock, the sector at a large, and, to predict the future price trends.
Fundamental analysis looks into the core performance and indicators of any company and compares the performance of that company to its competitors as well as the economy. Fundamental analysis includes scrutiny of, but is not limited to, financial statements, the management, the industry, the competition, and the economy. With the help of the financial statements and other indicators as mentioned previously, fundamental analysts come up with an intrinsic value for a given company. Intrinsic value, here, can be regarded as, in simple terms, the actual value of a company given its assets and business model. Fundamental analysts are of the opinion that the stock price of the company can deviate from the intrinsic value of a company and they invest in stocks which are undervalued i.e. where the company is trading below its intrinsic value.
Technical Analysis, on the other hand, doesn’t look at the well-being of the company like fundamental analysis does. Technical analysis evaluates a company based on price actions and volumes traded. With the help of price actions and volumes traded, technical analysts predict future trends and patterns. Technical analysts are of the opinion, that the stock price reflects all the relevant information and it is redundant to look into the financial statements and intrinsic value of a company.
| Fundamental Analysis | Technical Analysis |
|---|---|
| Considers various factors such as the financials, the industry, the economy among others | Suited for medium to long term investments |
| Considers price actions, volume traded, charts, patterns and trends among others | Suited for short-term investments |
| Indicators such as EPS, PE Ratio, ROE, ROCE among others are used | Indicators such as Candlesticks, RSI, Moving Average, MACD, and Bollinger Bands among others are used |
Modern investors use fundamental and technical analysis in tandem and it makes a lot of sense to do so. Fundamental analysis helps investors pick an undervalued company while technical analysis can help them time the market and exit the stock at the right time. However, an investor can decide to stick to one particular method, given their investment strategy, time horizon, risk appetite among other factors and no one method in general is better than the other one and both the method are quite effective. It is recommended to do your own research before selecting one method over the other or using both methods in tandem, given your investment strategy.