Fundamental vs. Technical Analysis: What's the Difference?

Updated September 22, 2023

Stock market analyses can help investors, traders and wealth managers make more informed investment decisions. Fundamental and technical analyses are two different methods for analyzing a market, and investors often use these methods to research and forecast stock prices. Learning about these two types of market analyses can help you make more informed investment decisions and better assess market trends.

In this article, we define fundamental and technical analysis, outline the differences between these two terms, list the advantages of each and offer tips for using these analyses to make investment decisions.

Key takeaways:

  • Fundamental and technical analysis are two trading disciplines that investors, financial advisers, wealth managers and other financial managers use to make more informed investment decisions.

  • Fundamental analysis uses economic and financial indicators to evaluate a potential investment, while technical analysis uses market data to predict the future price of an investment.

  • Technical analysis can be useful for determining when to make an investment quickly, while fundamental analysis can be beneficial for determining whether an investment is worthwhile in the long term.

What is fundamental analysis?

Fundamental analysis is the process of evaluating stock based on its intrinsic or inherent value. Investors who use this method of analysis consider the state of the economy, the conditions affecting the industry and the company's finances. Investors who complete a fundamental analysis may also research a company's earnings, assets, liabilities and expenses before making any stock-related investment decisions.

Related: 10 Stock Analysis Tools (And Why They're Important)

What is technical analysis?

Technical analysis is the evaluation of stock based on statistical data. Investors and financial advisers who complete a technical analysis evaluate a company's investment potential using stock charts and other indicators. They may evaluate data relating to its recent market history, current stock prices and trading volume. These datasets allow them to establish patterns they can later use to make investment decisions.

Related: How To Learn Technical Analysis in 4 Steps (Plus Tips)

Fundamental vs. technical analysis

Some investors and wealth managers use a combination of fundamental and technical analyses to make more informed investment decisions. They may use fundamental analysis to examine a company's long-term financial data, then use technical analysis to determine the best time to purchase a stock. Here are some of the primary differences between a fundamental analysis and a technical analysis:

Value determination

Fundamental analysis involves assessing various factors that might affect a company's viability, such as its cash flow and income statements. It attempts to predict a stock's future value by examining a variety of past data and trends. Technical analysis differs in that it predicts a stock's future value based on its current value and price movements.

Related: A Guide to Cash Flow: Definition, Importance and FAQs

Time frame

A fundamental analysis may use company data from over a span of several years to determine how a stock might perform. A technical analysis typically only reviews stock charts and data from the past few months, weeks or days. This type of analysis is often preferable for short-term trades, while fundamental analyses may be more useful for long-term trades or investments. The ability to assess financial statements that companies file on a quarterly basis can help them gain insight into the long-term viability of an investment.

Related: What Does a Technical Analyst Do?

Data and tools

Fundamental analysts often use materials such as a company's balance sheet to make investment decisions. They may also use its income and cash flow statements to determine how it might perform at a future date. A technical analyst usually reviews stock charts to identify trends. A stock chart can show investors how an organization's publicly traded shares are performing over a certain time period. For example, if a stock performs well, they may consider buying it.

Related: 10 Stock Analysis Tools (And Why They're Important)

Investment goals

Investors who use fundamental analysis may want to make more long-term investments since it can provide them with insight into a company's performance. For example, they may review company data from years ago to determine whether a particular company is a worthwhile investment. Investors who use technical analysis usually engage in short-term trades based on recent trends, enabling them to buy and sell different stocks quickly, regardless of how they're likely to perform in the future.

Related: How To Become an Investor (Both Retail and Institutional)

Advantages of fundamental analysis

Here are some of the primary advantages that fundamental analysis offers investors:

  • It uses a more comprehensive approach: Fundamental analysis allows investors to evaluate a company, its stock and its relationship to the economy in a more in-depth way since it uses a variety of historical data.

  • It considers more information. This type of analysis also considers a wider range of information that might be relevant to a stock's price, such as the state of the economy.

  • It can predict long-term trends. Fundamental analysis also allows investors to predict long-term trends more easily, allowing them to locate companies that have good growth potential and profitable products or services.

Advantages of technical analysis

Here are some of the advantages associated with technical analysis:

  • It allows for a faster assessment. Technical analysis can be a more useful method for investors who want to evaluate a stock quickly since many of its associated tools allow for immediate stock analysis results.

  • It allows for faster decision-making. Since technical analysis can make it easier for investors to assess a stock immediately, it can also enable them to evaluate many markets simultaneously and make more informed decisions faster.

  • It evaluates additional factors. This type of analysis also evaluates a number of other factors that other analyses don't, including market psychology, sentiment and supply and demand, allowing investors to make decisions based on current data.

Related: 16 Types of Traders (Plus Tips for Choosing a Trading Style)

Tips for using market analyses

Here are a few useful tips to help you conduct more thorough market analyses:

Use available tools

You can use technical analysis to evaluate price charts, which can help you determine the likelihood of a trend continuing or declining. These charts can help you decide when to sell a stock. When completing a fundamental analysis, you can use a variety of financial ratios to determine whether to invest in a certain company. Some of these ratios include earnings per share (EPS), price-to-book, return on equity and projected earnings growth.

Related: Price-to-Book (P/B) Ratio: Definition, Formula and Example

Combine both types of analysis

Investors can use fundamental analysis to determine which stock to purchase and technical analysis to decide when to purchase and sell it. Fundamental analysis can also help investors understand when business cycles might be best for a company, while technical analysis can help confirm trends. Using both of these analyses may help you improve your decision-making abilities and better understand the market.

Related: How To Do Market Analysis (With Steps and Tips)

Consider momentum

If you're a more experienced investor, it may be beneficial to consider the momentum of a stock rather than its current value. Momentum relates to the rate of change in the price of a stock or security over a certain time frame. Technical analysis can help investors determine the momentum of a stock, while fundamental analysis can help predict how long a stock's momentum may last.

Analyze trends

Market and price trends can be important considerations when conducting both fundamental and technical analyses. For example, if you notice a stock's momentum is beginning to decrease, you can use technical analysis to determine the best time to sell it. You can also use this type of analysis to find stocks that are slowly increasing in value before they become overvalued. Fundamental analysis can also be useful for predicting long-term market trends, such as the growth of a specific industry.

Related: Trend Analysis: Definitions, Types of Trends and FAQs

This article is for informational purposes only and does not constitute financial advice. Consult with a licensed financial professional for any issues you may be experiencing.

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