When you hear that you should research before investing, it usually implies either undertaking fundamental analysis or technical analysis of the stocks or financial instruments you might be interested in investing in. While the end-goal of both these forms of financial analysis is the same, i.e., maximize the return on your investment, both these forms on investments utilize different techniques to analyze stocks and financial instruments.
To evaluate which analysis method is better, we need to understand what exactly are these techniques of financial analysis.
Fundamental Analysis
Fundamental analysis is a technique of financial analysis that aims towards discovering the prevailing value of a business. This means calculating the intrinsic price of the company and its stock. Fundamental analysis takes into account economic factors such as revenue, profit margins, earnings per share, P/E ratio, sectoral fundamentals, and industry analysis.
Fundamental analysis analyses and compares the growth or decline of structural factors such as revenues, profit margins over some time. For instance, analyze whether the revenues or profits of a company have increased or declined compared to previous financial years, etc.
It also compares the financial performance of a business with its industry peers during the same period. For instance, if company A has a net margin of 10% and the company has a net margin of 12%, in such a case, investing in the stock of company B can be considered much attractive.
Technical Analysis
Technical analysis can be referred to as a methodology used for the evaluation of stocks and securities with the aid of market generated statistics. Technical analysis heavily relies on charts, patterns, and other statistical tools.
Some of the most widely used charts and patterns used for technical analysis include price trends, trading volume, changes in moving averages, statistical indicators, etc.
The Verdict
While the fundamental analysis was the most preferred form of financial analysis for stock traders and investors during most of the 20th Century, technical analysis has gained widespread popularity and acceptance as a financial analysis tool.
But coming back to the question, which is the better financial analysis technique? It is difficult to provide an accurate answer as both fundamental and technical analysis have their pros and cons. Nonetheless, both these techniques have the same end-goal, i.e., maximizing your returns on investment. Rather than wondering which method is better, it is crucial to focus on the importance of doing your research and financial analysis before making an investment decision.
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