Understanding Fundamental vs. Technical Analysis

Fundamental analysis is the approach of analysing a type of security by examining related economic and financial factors and measuring its intrinsic value.

Fundamental analysis is accepted as the cornerstone of investing and is about spending time going through anything that can affect the security’s value. Intangible aspects like quality of management and market share also have a great importance in analysis. A company’s fundamentals are basically divided into two main aspects; the quantitative fundamentals and the qualitative fundamentals.

Quantitative Fundamentals

Quantitative Fundamentals are capable of being measured or expressed in numerical terms and can be obtained from the financial statements of the company.

Income statement, cash flow statement and balance sheet are the three key fundamentals to consider.

  • Income statement shows the amount of money had been produced and spent in a period of time as a result of the business’ operations and measures the company’s performance.
  • The balance sheet represents the ability of the company to balance the resources that the business owns or controls.
  • Cash flows focuses on the cash from investing (CFI), cash from financing (CFF) and operating cash flow (OCF) and represents a record of cash inflows and outflows in a period of time.

Qualitative Fundamentals

Competitive advantage, management, corporate governance and the business model are the key fundamentals to consider. And it’s also important to consider how the company’s industry works.

  • Competitive advantage is the catalyst that drives the long-term success of a company.
  • Management is one of the most important criteria to consider because a good team can make a big difference and if the leaders fail to execute a plan, it is not possible to be successful even with the best business model.
  • Corporate Governance represents the policies denoting the relationships between stakeholders, management and directors and their responsibilities.
  • Business model basically represents how the company generates value for its customers.

What’s the Difference Between Fundamental and Technical Analysis?

Both fundamental analysis and technical analysis are used to research and forecast stock prices in the future, but they are at opposite ends of the spectrum.

Technical analysis uses stock charts to identify patterns and trends and the stock’s price and volume are the only inputs. Fundamental analysis, on the other hand, attempts to measure a security’s intrinsic value by examining related economic and financial factors including the balance sheet, strategic initiatives, microeconomic indicators, and consumer behavior.

What Is Intrinsic Value?

Intrinsic value refers to perceived or calculated value a company, an investment or an asset. Analysts use this value to categorize a security as overvalued or undervalued by comparing the intrinsic value with current market price of the security.

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