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Fundamental analysis is the detailed examination of the fundamental factors that influence the interest of the economy, industry and business. It is designed to measure the true intrinsic value of a stock by measuring the economic, financial and other factors (both qualitative and quantitative) used to identify occasions when the stock’s value deviates from its current market price. Fundamental analysis evaluates all the factors that can affect the value of the security (including macroeconomic factors and organizational factors), which are called fundamental and are nothing more than financial statements, management, competition, business concept, etc.
It aims to determine the To analyze the economy as a whole, the industry to which it belongs, the business environment and the company itself. Technical analysis is used to predict the price of a stock, which states that the price of a company’s stock is based on the interaction of supply and demand forces acting in the market.
It is used to forecast the future market price of the stock based on past performance statistics of the stock. To do this, first the changes in the price of the share are determined to know how the price will evolve in the future. The price at which the buyer and seller of the shares decide to close the deal is a value that combines, weighs and expresses all the factors and is the only value that matters.
Fundamental Analysis vs Technical Analysis
Fundamental analysis is all about forecasting cash flow
Fancy words like discounted cash flow (DCF), dividend discount model, price/earnings ratio belong in the realm of fundamental analysis. It attempts to forecast a company’s cash flows based on how the economy, industry, and company are doing. This EIC analysis is the first step. You then get a cash value, which is the benchmark for the market price of the stock. This gives an idea of what a share is really worth. They buy undervalued stocks and sell overvalued stocks. Technical analysis, on the other hand, believes that the market is king and therefore focuses on internal market data. The focus is on identifying repeating patterns and trends that the trader can profit from.
Analysts and cartographers define value very differently
Fundamental analysts view equities as an option on the company’s underlying assets and liabilities. The value of the company is only estimated based on the cash flows it generates. The fundamental analyst would sell stocks when the market value of the stock is greater than its intrinsic value and make a profit. The technical analyst debunks the concept of stock value, believing that prices are just random movements that cannot be predicted. However, since the markets reflect the collective knowledge and ignorance of investors, it is always more advisable to focus on studying these signals.
Contrarian views work best for fundamental analysts
Fundamental analysts don’t care about price trends and volume trends. They believe that if a stock has value, the price will eventually trend in the direction of value. The time frame is not clear to the fundamental analyst, but the belief is that this convergence should occur in the long term. They are also agnostic about waiting periods, which technical analysts are not. When fundamental analysts see value in a stock, they too are willing to trade against the market trend and buy or sell the stock.
For a technical analyst, the trend is the friend, and it is the trends and patterns that matter in the final analysis. Chartists believe that past trends will eventually repeat themselves and current movements can be used to study the future trend. For the chartist, once the underlying trend is identified, the rest is a piece of cake.
The fundamentals work better when the vision is long term
Fundamental analysis attempts to predict the value of the stock by assuming that the market price will eventually approach the intrinsic value. Here, the stock means the company that has a solid and running business. Fundamental analysis assumes that prices cannot be controlled or predicted. That’s why it’s important to stick with an idea from the start, even if it means going against the grain and waiting longer.
If you buy a quality stock that is undervalued early, you can make a profit. It is much harder to make a profit at Maruti and Britannia today than it was 5 years ago. The technical analyst is not overly concerned with cash flows and valuations. After all, for them, the price reflects everything.
The decision-making process is quite different.
Fundamental analysis is tedious and often thankless work. It involves a careful examination of financial statements, demand forecasts, quality of management, profits, and growth. Finally, the intrinsic value of the company is estimated through a mix of quantitative, qualitative and competitive factors. Technical analysis believes that decisions are made by listening to what the market has to say.
The basic lesson is to be humble and listen to the market. The market always has a story to tell and you need to hear that story. Of course, technical analysis uses a plethora of long-standing theories such as support, resistance, oscillators, overbought/oversold zones, stochastics, breakouts, Elliot Wave, etc.
They are based on your unique set of assumptions.
Fundamental analysis is based on the assumption that stock prices will converge at some point in the future. There is a lot of money to be made if said value can be cracked long before the market. Technical analysis assumes that it is impossible to identify multibaggers as the markets are intelligent and reflect everything. Therefore, the best thing to do in this type of random market is to spot trends and play on them. Trends repeat themselves because the traders operating in the market are the same and driven by the same emotions.
Final words: Basic differences between Fundamental Analysis vs Technical Analysis
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