Fundamental vs Technical Analysis | Guide to Two Main Financial Analysis Methods for Trading

September 29, 2021 | Editorial Team

When you have your eyes set on a new market for a possible long-term investment decision, you need to analyze it first to see if it’s worth your time and money. And the two main financial analysis methods at your disposal are fundamental analysis and technical analysis.

If you’re a beginner at finances and investment, you’re probably among the many beginners wondering what the best way to approach the stock market is and how to choose the right market and the right stock. Moreover, you can choose an online brokerage or a robo advisor to create your own investment portfolio, with minimum fees and fuss.

While you could follow successful investors like Warren Buffett for advice, you should understand the two analysis methods well. So follow along as we explain, compare, and contrast fundamental vs technical analysis.

Fundamental Analysis

Fundamental analysis is when you pick a business and thoroughly examine the economic factors affecting it, like the economy, industry, and company.

Through fundamental analysis of a company, you should be able to get an idea of the intrinsic value of its stocks that may not be the same as its listed stock price – talking of which, see also best Canadian stocks and top ETFs that you can add to your portfolio.

You can then make decisions based on your results. For instance, if you find that the company has more intrinsic value than its stock prices, then perhaps it’s an investment opportunity for you.

Also, fundamental analysis is based on the assumption that stock prices don’t change immediately when there’s a fundamental change in the company. For instance, if the company experiences a positive change that should increase its share price, there will be a delay and an increase in stock price.

And that’s where you, alongside other fundamental analysts, come in to capitalize off your results to gain an advantage over your competitors by purchasing presumably undervalued stocks and waiting for their value to adjust on the stock charts (see best Canadian 5G stocks, the ones to buy right now, or Air Canada stocks in here).

Fundamental analysis takes its name from fundamentals, which are all the factors usually included in the analysis scope, ranging from macroeconomic factors like inflation to company-specific factors like the company’s financial statements.

Moreover, fundamental analysis aims for comprehensiveness. It aims to analyze the company’s intrinsic value and the industry to which it belongs, the conditions and environment surrounding the company, and even the economy as a whole.

Typically, fundamental analysis focuses on different qualitative and quantitative values that affect a company. If you’re unfamiliar with these terms, we’ll explain them in some detail and give you some examples now.

Qualitative and Quantitative Factors

Qualitative factors don’t include numbers but rather facts that we can reach logical conclusions through.

Due to the nature of qualitative factors, they’re usually not 100% objective, and different analysts could reach different conclusions through their data.

Some examples of qualitative factors are the customers’ general level of satisfaction towards the company’s products, the community surrounding the company, changes in staff, upcoming technology, market trends, market activity, etc.

By contrast, quantitative factors include numbers, statistics, and numeric variables. And because the results are represented in numbers, they’re typically more objective than their counterparts.

Examples of quantitative factors are the number of hours a company’s employees work, the cost of raw materials, product return on investment, the product market price changes, the company’s financial statements, cash flow statement, etc.

a person analyzing numbers on a cellphone

Technical Analysis

Technical analysis is when you collect and analyze the company’s past data, specifically financial data, to predict future price movements.

Technical analysis works off the assumption that supply and demand determine the stock price in the marketplace. However, in contrast to fundamental analysis, technical analysis focuses on only past data to predict future costs and the company’s future intrinsic value.

When conducting technical analysis, you’ll have to consider technical indicators like the company’s past performance on the stock chart and the price movement to forecast the future price trends.

Therefore, the only factor that matters for technical analysts is the price of one share, which the buyer and seller agree on.

However, technical analysis considers price as a multifaceted factor, as it can represent other “mini-factors” such as the company’s state, the attitude of the customers towards the company, and so on.

Moreover, while the change in price matters, there are a few more variables related to the price change, namely, the time it took for the price to change, the magnitude of the price changes, and the breadth of the change.

Time, Magnitude, and Breadth

Time, magnitude, and breadth of change are necessary because they help show how much the price will change over what period.

How quickly or slowly the price changed reflects how much the demand or supply for a particular company, its products, or products in the industry it’s part of.

How much the price goes up or down also contributes to this statistic. For example, a sudden significant increase in demand will result in a proportionately large increase in share prices – as a shareholder, you should know more about eligible and non-eligible dividends, too.

Also, is the change exclusive to the company you’re researching or other companies in the same industry as well? Knowing this can show you the scale over which the change is happening.

A Comparison of Fundamental and Technical Analysis

Let’s look at four major points of comparison between fundamental analysis and technical analysis.

1. Purpose

Fundamental analysis is used for long-term investment, while technical analysis is used for short-term investment to trade quickly.

2. Data Type

Fundamental analysts use past and present data, while technical analysts use only past data. Either way, both aim to predict future changes.

3. Aim

Fundamental analysis aims to find the intrinsic value of a company’s shares, while technical analysis aims to find the perfect time to invest in a company.

4. Data Source

Fundamental analysis data is collected from financial statements and reports, such as income statements, cash flow statements, industry statistics, etc.

By contrast, the only data used in technical analysis is sourced via chart analysis.

Fundamental vs Technical Analysis – Which One Should You Use?

Finance is a complicated topic, and there’s no simple solution that works the same for everyone. Whether you choose fundamental analysis or technical analysis depends on what you want to achieve and how much risk you’re willing to take.

Should I Use Fundamental Analysis?

Fundamental analysis is better if you’re looking for a long-term investment with a lesser risk of failure.

If you’re opting for fundamental analysis, you should have hopes of buying the stock at a bargain price and holding onto them for the long term as they grow for financial security.

Just be ready to spend many hours on fundamental analysis for every single investment opportunity because, as we said, fundamental analysis is more time-consuming than technical analysis.

You’re also going to have to familiarise yourself with the market you’re investing in. Understanding the market is crucial for long-term financial investors using fundamental analysis and can help you pick up indicators and react accordingly.

a man with glasses looking into the graphs

To start, you should do a little research on the different industries you can invest in then pick the most opportune one.

Also, you’ll want to spend more time picking one company that you’re sure will gain you more profit than loss.

As for risk, fundamental analysis is less risky than technical analysis due to the sheer amount of time you spend researching and gaining a detailed understanding of the company and industry you’re investing in.

Should I Use Technical Analysis?

Technical analysis is your go-to if you’re looking for short-term buying and selling and are ready to take on a bit of risk.

The relative riskiness of technical analysis is because no matter how promising a trend is and how solid the algorithms you’re using, you can never be 100% sure of what will suddenly change in a market.

For instance, look at Bitcoin – no one could’ve predicted that something that was practically worthless per unit would be worth tens of thousands of dollars just one decade later.

But despite the risk, many still use technical analysis because when you win, you win big, provided you know what you’re doing, of course.

a smiling woman with glasses with graph and charts

That’s why technical analysts are usually seasoned investment veterans who have an eye for the tiniest changes in the company’s shares. They also usually invest in enormous numbers because there’s a chance of a lucrative return if their analysis pays off.

Using Fundamental and Technical Analysis Together

Some investors have had great success combining fundamental analysis and technical analysis. Some technical analysts use fundamental analysis to support their findings, while fundamental analysts can use technical analysis to look for a specific entry point for an investment.

Using fundamental and technical analysis at the same time will cost you more time, but the result is greater security with lesser risk.

a graphs displayed on the board outdoor

The Bottom Line

In conclusion, there’s no simple answer to the debate of fundamental analysis vs technical analysis. Both analysis methods try to predict future trends using different methodologies: fundamental analysis uses economic factors, and technical analysis uses past price changes. Moreover, fundamental analysis is better for long-term investors, while technical analysis is better for traders.