Wednesday, November 2, 2016

What is the Differences Between Fundamental and Technical Analysis?

Fundamental Analysis:

Fundamental Analysis involves studying company performance and market conditions
Picture Depicts the Concept of Fundamental Analysis

Fundamental analysis is a thorough analysis of company carried out with the intention of buying the shares for long-term investment. It is based on studying the profitability of the operations, assets and liabilities position, cash flows, etc., going as far back into the past as possible. During the process a number of important ratios as under are derived and used:
  1. Profitability Ratios: EBDITA, EBT, PBT and PAT margins.
  2. Liquidity Ratios: Current and Quick Ratios.
  3. Long term Leverage Ratios: Debt-Equity and TOL/ TNW.
  4. Market Conditions: PE Ratio, Price to Book Value, Dividend Yield, Distance fro 52 week-low. Five-Year Returns.

Picture showing various fundamental analysis ratios of Infosys
Picture Shows Fundamentals of Infosy Share

Technical Analysis:

Technical Analysis is the charting the price movements and attempting to interpret short-term market behaviour of stock with intention of making a profit from trading in stocks, commodities and currencies and their derivatives.

Candle Stick Technical Chart of Infosys Share from may to october 2016
Candle Stick Chart of Infosys Ltd. Share from May to October 2016

Differences between Fundamental and Technical Analysis:

Differences Between Fundamental and Technical Analysis
Sl. No.
Fundamental Analysis
Technical Analysis
Rational Science
Pseudo Science
Current Market Price is one of the inputs
Market prices and their movements is the only input – facts relating company’s performance are not relevant
Used for evaluating fitness of stocks for long term investment
Used for taking short terms positions
Does not involve market prediction
Prediction of future market behavior is the sole purpose of technical analysis
Used by investors
Used by day traders and margin traders
Primarily intended for taking delivery of scrips
Not intended for taking delivery – trades are primarily meant to be squared-off within the same day or by the end of the contract period
Only relates physical shares
Primarily relates derivatives like futures and options but also involves physical shares in the intra-day trading


While fundamental analysis is an exacting and rational discipline, technical analysis is a false study endeavouring to derive legitimacy from the use of charts and graphs and the lofty sounding name. Whatever realisation of predictions may be owing to the innumerable practitioners acting according to the interpretation of the pattern and not directly caused by the pattern – something akin to divination of future employed in the ancient times.

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