differences b/w fundamental and technical analysis.
Rajiv
(Director)
(42 Points)
Replied 24 August 2011
Fundamental analysis is the study of fundamentals related to any stock, commodity, or currency, or the underlying to any other financial product. For example, in case of a stock, say of Reliance, you would like to study the strength of the company, the order book it has, the previous performance and the ratios, the position it occupies in the industry, whether it has a unique product or is active in a niche area, you would study the financials and the networth of the company, you would study whether there is something in the financials which does not give a rosy or an encouraging picture and vice versa, you would like to understand about the general economic scenario, changes in laws etc either favourably or otherwise effecting the company's performance or size of operations. In a nutshell, you would like to understand through the numbers whether this is a right pick at this price or not, and the likelyhood of increase in price in case the performance of the company increases in line with the projections, and the likelyhood of these projections holding true owing to the factors listed above or other factors.
Technical analysis, on the other hand, looks at the market action which is happening on the same stock in terms of charts and graphs, to get an understanding of what the players are doing, and whether the bulls or the bears have an upper hand, and what the smart money which is overshadowing the weak hands accomplishing. In technical analysis, the performance of the scrip vis a vis volume, chart patterns, and several other indicators is studied to predict the likely action. In the stock markets, in the short term and medium term, only technicals work, and the fundamentals work only in the long term. So technical analysts try to see what the smart money is doing in terms of market action on the stock, to try to predict whether it should be bought or sold. It is said that technical analysts will not even ask for any details on the company and will try to predict the movement without looking at any underlying fundaments.
The key to stock market riches is to employ both the technical and fundamental analysis to your advantage. I pick a scrip on investment afer I am absolutely sure that fundamentally this is a good scrip to have in my portfolio, and use technical analysis to find out the right entry and exit points. In case you are able to do this successfully, the stock market can give you very good profits/returns. I have posted this on my blog empowertheloser.com in 'the consultants' blog' page, so any further discussion on this you need please post your query there.
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