In the share market, most crucial question is, which stock to buy? Different types of retail investors, try to find the answer to this question in different ways:-
- Some people choose random stocks.
- Some people choose the script based on random tips, SMS, friend’s call etc.
- Some people decide on the stock based on their emotional call supported by news rumours.
- Only a few people decide to find a stock based on share data analysis.
Those people who invest based on random tips or news rumours may make some profit for some time but finally ends up in losses as they may get trapped. A mutual fund would be a better option for those people who cannot use data analysis as mutual funds are managed by professionals where buy and sell decisions are taken professionally with share analysis techniques i.e.
- Fundamental Analysis
- Technical Analysis.
Some investors like to invest on the basis of fundamental analysis but some like to invest on the basis of technical analysis. Due to various disadvantages of fundamental analysis, some investors shifts to technical analysis for selecting the script for investment. As we know the “market price of share” is the only parameter that covers all the factors affecting the movement of the share price. Hence in the technical analysis, we analyze the movement of the share price on various technical indicators. Let’s find the PROS & CONS of Fundamental Analysis AND Technical Analysis for investment in the SHARE MARKET.
PROS of Fundamental Analysis:-
- Fundamental Analysis is about finding the true value of the company i.e. Intrinsic value of the business.
- Fundamental Analysis is wide enough to cover Industry analysis and competitor analysis.
- Fundamental Analysis also takes care of the business model.
- In fundamental analysis Risk analysis is also done before investment.
- Fundamental Analysis tries to cover as many factors as possible.
- Fundamental Analysis protects us from investment in shares showing fake hikes.
- Through fundamental analysis, we can find companies whose share price is trading below their intrinsic value and it can give many folds return in long run.
- Fundamental does not change frequently hence we may prefer fundamental analysis for long-term investment.
CONS of Fundamental Analysis:-
- Fundamental Analysis focuses on finding the true value of the business but It is very hard to fund Intrinsic value.
- Intrinsic value varies with our choice of discounting factor. Hence two investors may arrive at two different intrinsic values for the same business.
- There is a large number of factors affecting the share price of a company. We cannot take care of all the factors in our analysis. Hence Fundamental Analysis is not perfect.
- Fundamental Analysis ignores the emotional call/expectations of investors, but it is the expectation of investor which turns into demand and accelerate the share price. Hence in short term, the fundamental call may not give the expected return.
- Sometimes the Intrinsic value of a share is very less than the share price but still, the share price keeps on increasing constantly due to sentiments or expectations of some bigger announcements.
- Fundamental Analysis requires a large amount of data which takes a lot of time and we may miss short-term investment opportunities.
- Maintaining the Accuracy of data used in fundamental analysis is a challenging task.
PROS of Technical analysis:-
- We need not focus on the financial account of the company but only on the share price.
- There are various indicators to help understanding the trend of share price.
- We need not focus on unlimited number of factors but only on some indicators.
- Technical analysis is faster than fundamental analysis. Hence it saves time and we can timely take investment decision so that no opportunity is missed.
- If is based on movement of price without going into reason why the price is moving.
- Using various technical indicators, we may find many short term investment opportunities and earn good return.
CONS of Technical Analysis:-
- There are many technical indicators, some may signal to buy but others may signal a sell. Hence without experience, there are chances of wrong decisions.
- Without the help of software, It is not an easy task to calculate the value of various indicators.
- Price movement may not be supported by fundamentals Hence we may not get the expected return in the long run.
- Technical indicators change for every change in price. Hence due to very frequent changes in technical indicators, we may have to do many buy/sell transactions to get the expected return.
Comparison of fundamental & Technical Analysis
|Fundamental Analysis||Technical Analysis|
|1. Based on the true value of the business||1. Based on share price movement.|
|2. We need books of accounts and related data.||2. We need the share price history with volume.|
|3. Fundamental Analysis takes a longer time.||3. Technical Analysis takes a shorter time.|
|4. Beneficial for long-term investment.||4. Beneficial for short-term investment.|
|5. Analysis of various factors responsible for share price movement.||5. Analysis of only share price to find various technical indicators.|
|6. Fundamental Analysis cover Business model and risk analysis.||6. Technical analysis does not cover business models or business risk analysis.|
|7. Fundamental of a business does not change frequently.||7. Technical Indicators change with the movement of price hence more frequent.|
|8. Fundamental Analysis cover industry analysis.||8. Technical analysis does not cover industry analysis.|
|9. Fundamental analysis finds “WHY” the share price so and what is real value.||9. Technical Analysis focuses on “What” is the price. It does is go for “WHY”.|
|10. Once the script is chosen fundamentally, then the investment is done. Hence many buy/sell transaction is not required.||10. We may have to do many buy/sell transactions due to changes to technical indicators.|
Which is better Fundamental Analysis or Technical Analysis
Fundamental & Technical analysis have their own advantages and disadvantages as stated above. Hence it is recommended to use both to take advantage of both and avoid the disadvantages of both. For example, if a company manipulated its financials to get an extraordinary hike in its share price and someone invested in the company assuming that its financials are strong but when the bubble burst, the fundamental investor will hold the stock and bear a huge loss. But in this situation a technical investor exit when a major level is broken, as technical indicator changes with a change in price that’s why technical analysis is preferred over fundamental analysis. But it does not mean that every company manipulates its financials Hence we should not ignore fundamentals and when a company is fundamentally strong then we should check technical indicators to find the right time to enter and exit. Hence Taking decisions based on combined analysis (Fundamental as well as technical) is the key to getting the expected return in the share market.