Fundamental or technical analysis: Which one to opt for?

Investors often get confused about fundamental and technical analyses, not knowing which one among these two to follow while making investments. These analyses offer two different perspectives of looking at the stock market. The fundamental analysis presents an analytical perspective of the company in terms of its past financial performance and the status of the industry it is operating in as well as perspective of the management quality and the growth prospects of the company’s business. The fundamental analysis may also take into account macroeconomic factors such as government policy, interest rate, inflation rate, etc. Since these fundamental factors can make or mar a company’s prospects, the analysis is called fundamental analysis. These aspects of a company may take a long time to come to the fore and, therefore, fundamental analysis is suitable for the long term investors.

In contrast, technical analysis is based on hourly, daily, weekly or monthly price movement of the stock. A stock’s price movement is a function of demand for and supply of the stock at a given point in time. When the demand is higher than the supply, the price of the stock moves up, and when the supply is higher than the demand, the stock price moves down. The demand and supply at a given point in time may depend on fundamental factors such as financial performance of the company, interest rate, government policy, etc. However, technical analysis does not directly take into account the fundamental factors, but considers only the technical factors of demand and supply for determining ‘buy’ or ‘sell’ price for a stock. Since the stock price moves up or down on a daily basis, it can be said that technical analysis is suitable for day traders and short-term investors.

Therefore, one can say that the time factor determines the choice between fundamental analysis and technical analysis. So, generally speaking, if you are a day trader or short-term investor, you should go by technical analysis, but if you are a long term investor, your investment decision should be based on fundamental analysis. Of course, if you are well-versed in both fundamental and technical analyses, then you can employ both analyses judiciously to take better investment decisions.