Comparing Technical Analysis vs. Fundamental Analysis

By Indeed Editorial Team

Published 23 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Professionals that invest in the stock market can generally improve their ability to successfully receive returns on their investments by analysing the current state of the market. Two methods of analysing the stock market are technical and fundamental analysis, and both can offer unique perspectives to the analyser. Learning more about these methods of stock market analysis could help you understand the stock market and know how to interact with it. In this article, we discuss the technical analysis vs. fundamental analysis methods of understanding the stock market, including definitions and tips.

What is technical analysis vs. fundamental analysis?

Technical analysis vs. fundamental analysis are two methods of conceptualising the value of a stock based on distinct data factors. These forms of analysis can help an investor strategise on when to purchase and sell their stock based on either its current value or its history of value appreciation. Technical and fundamental analysis may also offer complementary perspectives on the same stock, so an investor could potentially perform both types of analysis to inform their investment decisions. For more on these analyses, you can review the following definitions:

Technical analysis

Technical analysis refers to the process of determining a stock's value using its potential for growth. Analysts using this method generally don't consider the assigned value of the stock as a factor in their purchasing decision. Rather, this form of analysis emphasises the importance of recent historical data related to the stock. Analysts can represent these findings in line graphs that indicate the trajectory of the stock's value. Relevant data to this form of analysis includes its current price and its stock price over the last few months. This information can help an analyst recognise patterns in the stock's value.

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Fundamental analysis

Fundamental analysis is a process in which an analyst determines a stock's value based on its price and the health of the company selling the stock. This kind of analysis can include reviewing the financial standing of the company selling the stock, including its earnings, assets, liabilities and expenses. Fundamental analysis also considers external factors, such as the state of the economy and the current health of the industry in which the company operates. This form of analysis typically focuses on the long-term state of the stock and the company.

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Key differences between technical and fundamental analysis

To help you understand the differences between these forms of stock market analysis, consider reviewing the following key variations:

Value determination

The ways that these forms of analysis determine the value of the stock offer distinct insights into it. Fundamental analysis stresses the importance of adjacent factors that affect the health of a business and the value of the company's stock. The company's cash flow and history of income statements are important forms of data for determining stock value with fundamental analysis. Technical analysis determines stock value using predictions based on the company's recent trends. Data that indicates the recent value of the stock would be useful in determining value by the technical analysis method.

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Timeframe

Another significant difference in these forms of analysis is the timeframe over which an analyst collects data about the company. Fundamental analysts typically review company data charts to determine how the stocks may perform. Meanwhile, technical analysts generally only review stock charts from the company's recent history, such as from the last few weeks or months. Technical analysts use recent data to map short-term stock trends, while fundamental analysts may want to determine the potential health of a stock over years.

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Data collection tools

The tools that each form of stock analysis use relate to the methods by which they determine stock value. For example, given that fundamental analysts emphasise the importance of a company's financial history, a valuable tool to perform this analysis would be the company's balance sheets from the last five years. Meanwhile, technical analysis could benefit from charts depicting the stock's value in the last month.

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Investment type

An investor may choose one method of analysis over the other based on the kind of investment that interests them. Fundamental analysis could provide the investor with a long-term view of the value of the stock. This could help the investor make an informed long-term investment decision. Technical analysis could help an investor who wants to make short-term stock purchases. If a stock has a recent history of trending positively, the investor could review this positive trajectory and purchase the stock to sell it in the near future.

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Stock selection using both technical and fundamental analysis

As both forms of analysis offer information for different periods of time, an investor could benefit from using these methods in conjunction. For example, if an investor wanted to purchase new stock, they may first want to determine if the company has a history of positive financial growth. To discover this information, they may first use fundamental analysis. If the company's historical records indicate positive growth, then the investor may use technical analysis to determine when may be the best time to purchase the stock.

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Advantages and disadvantages of fundamental analysis

The following are common advantages and disadvantages of using fundamental analysis:

Advantages

Fundamental analysis can provide an investor with a more comprehensive perspective on their investment decision. By reviewing the company's history, the industry's history and the general economy's impact on the price of the stock, the investor may discover reliable trends. This form of analysis considers this broad range of factors over a long period, which can also benefit the investor's purchasing decisions related to other stocks. With a data set this large, the investor may make a better-informed choice.

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Disadvantages

Due to the broad range of data that fundamental analysis uses, it can take a significant period to collect all the information. While there are third-party resources that can help accelerate this process, many other investors also have access to the same information. This can result in many investors purchasing stock at one time and inflating the price. This form of analysis is also inefficient for short-term purchasing decisions when an investor uses it in isolation.

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Advantages and disadvantages of technical analysis

The following are common advantages and disadvantages of using technical analysis:

Advantages

Technical analysis provides insight into a stock's value in a short period. This can allow an investor to purchase stocks quickly when the price is low. This form of analysis also evaluates price targets, which can provide an investor with the information to create multiple investment strategies. The short-term stock charts that technical analysis uses usually undergo a verification process that generally assures the information is more accurate than a company's financial history. Additionally, technical analysis can include short-term subjective factors, such as psychology and supply and demand.

Disadvantages

Technical analysis can also offer challenges, as some of the stock charts that technical analysts use may lack verification. This form of analysis can also generate multiple results from similar data due to subjective factors. Technical analyses can result in riskier investment opportunities.

Tips for using technical or fundamental analysis methods

Given that these forms of analysis provide different benefits, there are circumstances in which one may be more advantageous to use than the other. The following are example situations in which an investor could use either fundamental or technical analysis:

  • Evaluating price charts: Investors may review the trajectory of a stock's price to determine if the stock is trending positively or negatively, which can affect their decision to purchase or sell it. Technical analysis can empower an investor to make strategic decisions based on these price charts.

  • Finding new stocks to purchase: If an investor wishes to purchase new stocks, they may benefit from using fundamental analysis. This can help them determine when business cycles may be best for a company.

  • Confirming trends: To ensure that a stock's trajectory is relatively stable, an investor may use technical analysis. This can help them confirm the stock's current trend.

  • Analysing a stock's momentum: Rather than focusing on the current value of a stock, an investor may determine a stock's potential to continue increasing in value. This investor could use technical analysis to determine the current momentum of the stock and then use fundamental analysis to predict how long the stock may maintain that momentum.

  • Tracking the life of a stock: Technical analysis can help an investor determine when the stock is at its maximum value. With this information, the investor could sell the stock for a profit.

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