Difference between fundamental and technical analysis of a Stock

Difference between fundamental and technical analysis

Understand the difference between fundamental and technical analysis of company before investing in its share. Let us dig down.

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Debates are still there among the beginners in the stock market on the difference between fundamental and technical analysis. The question is if fundamental analysis is better than technical analysis and which one to follow. I met a few people at a recent function at my native. Many of them have just joined the stock market rally and a few of them are just college pass outs wanted to join the market looking at the rally.

While discussing with them, I shocked to find that many of them are blindly entered into the stock market just to burn their hands. I have good experience in the Indian share market but still, I have to think a lot and do a lot of due diligence before investing in any stock. It does not matter if you invest for the short term or long term.

But you need to have your analysis about a company before investing. Many people are just following tips from TV news or so to invest or trade without having a proper system in place. That is wrong and after burning their hands, they complain about the share market.

In this article, I would like to share some parameters on fundamental analysis of stocks and technical analysis of stock trends that will help to judge the company or the stock before investing. But before going dip into the analysis let us discuss what is the difference between fundamental and technical analysis.

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Difference Between Fundamental and Technical Analysis

While speaking about the difference between fundamental and technical analysis, we are speaking about stock analysis. These are two main approaches investors use to evaluate a stock or a company to invest in. There are a lot of differences between these two approaches. They differ in what information they consider to evaluate the stock.

Usually, retail investors or beginners in the stock market are thinking about which approach is good to consider before investing in a stock. Many believe in fundamentals and few others focus on technical analysis. However, I tried to cover both in my stock analysis. I also suggest beginners start with fundamental analysis and then learn technical analysis to gain confidence in the market.

Let us discuss what is considered fundamental analysis and what parameters, we should consider to analyse a stock under each approach.

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What is Fundamental analysis for beginner

Fundamental analysis of stocks mainly focuses on the intrinsic value of the company or the stock to invest in. In fundamental analysis, investors need to do proper due diligence about the company’s performance such as the company’s financial statements, its management team, industry trends, and the overall economy. This helps to assess the long-term potential of the investment.

The investor will be able to make informed decisions about a stock if it is currently undervalued or overpriced. This approach is typically used for long-term investing strategies. However, investors who are looking for short-term and medium-term gain also need to understand the basic parameters of fundamental analysis of stocks to understand the potential of the stock. Below are a few minimum parameters to keep an eye on while considering an investment in any company or its stock.

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Earning: To do fundamental analysis of stocks, earning is the most important parameter for any stock to move up or down. The stock market cares little about the past of any company. Mainly stock market cares about the future, namely, future growth or future earnings. If the market feels that a particular company has strong future growth potential and they are going strong because of a powerful force behind it, then the stock will perform strong continuously.

For earning you need to review the annual net sales of the company, annual net profits, and quarterly net profit. Check if these parameters are growing along with the stock. In case the stock has not grown for a long time but profit has grown, there is strong potential that the stock will grow sooner.

Earning Per share and PE are two important parameters of fundamental analysis of stocks that must be watched carefully. Always compare all the parameters with their historical value. In my view, if the PE is less than EPS, it is a good company to invest in considering other parameters are looking good.

From an investor’s point of view, the shareholding pattern is most important. We must look for promoter holding, FII, and DII holding. What I consider is there should not be any promoters pledging, FII and DII holding should remain constant or grow from quarter to quarter.

Other important factors to consider while doing fundamental analysis of stocks are debt and interest coverage, in my view debt to equity ratio should be less than 1 and interest coverage should be higher than 1.

These are a few basic or minimum fundamental parameters to analyze a company. These are the fundamental parameters that one must consider before investing in the stock.

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In Technical analysis, we need to focus on the supply and demand of the equity share in the market. To understand the technical analysts of stock trends, analysts use charts to enter into a stock. They look at the historical price and volume data to identify trends and patterns. There are many indicators that technical analysts are using to predict future price movements and capitalize on short-term trading opportunities.

However, one can not master all the technical parameters. It is important to practice a few important parameters to judge the price movement. I consider below technical analysis parameters below to measure the price movements of a stock.

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Relative strength index: This is one of the most important parameters for me to consider a stock movement. This can be used for any time frame. If a stock has a daily, weekly, and monthly RSI (14) greater than 50, the stock is in a bullish trend. But you need to master this indicator in detail before jumping to the conclusion.

Relative strength (RS) against benchmark index (Nifty): RS refers to how a stock or another index performs compared to the Nifty itself. This is a simple calculation of dividing the percentage price change of a stock over a period say one month by the percentage change of the Nifty over the same period. If the RS > 1, the stock has outperformed the Nifty. This is a good sign to buy the stock if RS is starting positive.

Moving averages (Simple daily moving average (DMA) and Exponential moving average (EMA) such as 50 DMA, 200 DMA, 21 DMA, etc., for the long-term or short-term outlook of a stock. What I used to do is, I do not buy any stock below 200 EMA and usually sell the stock if it falls below 50 DMA.

Fundamental analysis vs technical analysis

Fundamental Analysis of StocksTechnical Analysis of stock trends
To understand
the intrinsic value of the company
To understand
the Market trends and price movements
Annual Net SalesRSI
Annual Net Profits Relative Strength Vs Nifty
Future prospects of
the products of the company
Moving Averages
Sector GrowthPrice and Volume
Economic growth,
to understand long term growth story
Mainly to capitalize short term price move

Final Thoughts on fundamental analysis vs technical analysis

These parameters are not exhaustive but I shared the one that I have been using for my investment. I consider both fundamental and technical analysis to finalize a stock to invest in. Hence, I would recommend you analyze both approaches before considering an investment in a stock. The most important concept here is to practice. The more you practice the easier it will be for you to understand the concept and evaluate stock for investment.

You will face challenges to start with but with practice, it will be easier for you. For example, when you start driving training, it is difficult but with practice, it settles in your muscles and you drive without making mistakes. The stock market journey is just a practice.

Disclaimer: The above article and the concept are for my study and I put it here if this will help any beginners.


How do you study fundamental analysis?

The factors that impact the intrinsic value of a company is known as fundamental factors such as its financial statements – net sales, net profit, cash flow, EPS, etc. , management team, industry trends, and macroeconomic conditions.

What are the steps of fundamental analysis of stocks?

1. Understand the Company products and evaluate the future performance of these products in changing global environment.
2. Understand the promoters vision, their experience and performance over the period.
3. Understand the financial statement and evaluate the future performance of the company.
4. Study the company’s competitors use Porter five forces to evaluate its competition. Reach out to us if you need this analysis of any company.
5. Understand the economic performance and sector performance related to that company.

Why is fundamental analysis of stocks important?

The fundamental analysis is important to understand the future prospects of the company before investing in.

How to learn technical analysis of stock trends?

It is important to understand various parameters of technical analysis and practice them. It is not necessary to learn all the technical parameters rather to master a few parameters and practice them.

Reach Out to Us

To Get daily news and analysis

or research reports

please contact rose@mind2markets.com

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