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Fundamental vs Technical Analysis of a Stock

22 Jun 2023

The most confusing aspect of any investor’s life is whether to bank on the best stock tips according to fundamental analysis or technical analysis of stocks. Even if you do undertake the huge task of analysing stocks in both these ways, you may still not know which stocks to invest in ultimately. Furthermore, the whole activity is an exhausting one, and experts agree that it is a challenge to spot stocks which are both financially and technically robust. If you do find stocks like this, they would be few and far between. 

Fortunes of the Stock Market

Individuals can make their fortunes by trading in stocks, but most of them follow one of two paths - either technical analysis or fundamental analysis. However, analysts themselves agree that traders do a bit of technical analysis with fundamental checks and vice versa. The stock market today is a place that is filled with analysis of all kinds. Nonetheless, although you may get a bunch of stock tips or recommendations from domains of the public, you should refrain from following those. They can mislead you to say the least. To make real fortunes in the stock market you must make your own analysis, picking stocks based on the strengths of a fundamental and technical nature. Firstly, though, you should be sure about the differences between fundamental analysis and technical analysis, based on what they are. 

Fundamental Analysis 

When we speak of fundamental analysis, we have to essentially think of certain terms that are involved in this kind of analysis. In the most vital way, fundamental analysis involves research into financials as well as vital ratios like price to earning or P/E ratios, and price to book value or P/B ratios. There are more aspects to delve into later, but for now, you should note that stocks that have a low P/E and a low P/B establish an appeal and make up the best stock tips today. What a low P/E means is high returns in the future. Low P/B represents the fact that stocks are undervalued. One more aspect is Beta, indicating the volatility of stocks. In case the Beta value is more than 1, it means that stocks are volatile compared to markets. Similarly, companies that have high-dividend yields and which are debt-free are fundamentally quite strong. You must study various parameters with one another. For layman investors, it is simple to undertake fundamental analysis as compared to carrying out technical analysis.

Technical Analysis 

Technical analysis is a little more complex for a lay person to grasp than fundamental analysis is. The best stock tips usually have their basis in this, but you will discover that seasoned investors may not be able to handle it. In technical analysis of stocks, there are some crucial indicators like the relative strength index, bollinger bands, etc, and there can be upto 30-40 technical indicators. When investors engage in technical analysis,  they essentially establish a stock’s strength and trend from the perspective of trading. 

Fundamental vs Technical Analysis 

Based on certain factors, you can do technical and fundamental analyses of stocks in the stock market today. These factors are:

  • Time - Fundamental analysis is done with stocks you wish to hold for the long term. For instance, the stock of a potentially robust company that grows over time will give you gains. Technical analysis is done for the holding of stocks in the short term. These are “bullish” stocks. 
  • Risks - It is clear that stocks that are fundamentally strong are less risky than ones based on technical variables. 
  • Tracking - It's easier to track fundamentally strong stocks, as you do so over a lengthy period. However, stocks held according to technical analysis have to be monitored constantly for sudden shifts and volatility.

Invest With Care

When you invest, it’s a good plan to invest with attention to the analysis of stocks. A good broker like Motilal Oswal does all the analysis for you when you sign up and open a Demat account which is free of cost. 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

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