Fundamental vs. technical analysis: overview and differences

By Indeed Editorial Team

Published 14 November 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Fundamental and technical analysis are two ways of analysing the stock market, to help investors and fund managers make better investment decisions and maximise their profits. Both fundamental analysis and technical analysis have their own strengths and unique benefits, together with some disadvantages. Making the right decision about which type of analysis is most suitable in any given situation can make a significant impact on your decisions and the success of your investments. In this article, we discuss fundamental vs. technical analysis, including looking at the differences between them and examining the strengths and weaknesses of each.

What is fundamental vs. technical analysis?

When considering the differences between fundamental vs. technical analysis, it's useful to first provide a brief definition and overview of each approach. Fundamental analysis is the process of assessing and evaluating stock by its given value. Analysts consider a variety of factors, such as the overall state of the economy, industry trends and company finances when making investment decisions. They might research a company's income, assets, liabilities and expenses to inform their decision-making.

Technical analysis differs slightly from fundamental analysis, as it uses statistical data to evaluate stock. Technical analysts don't evaluate a market by assigned value. They use stock charts and statistics to assess and estimate a stock's potential. Data that analysts may draw upon for their decision-making includes recent stock history, current stock prices and trading volume. This can help them identify patterns and trends and predict the future performance of any given stock.

Related: 7 types of financial analysis (with useful examples)

Differences between fundamental and technical analysis

Fundamental analysis and technical analysis both approach things very differently when it comes to evaluating the value of any given stock. The differences in approach can result in different evaluations of the predicted value and performance of stock. Here's an overview of some of the ways fundamental and technical analysis differ:

Value determination

One of the key differences between fundamental and technical analyses is the way they determine the value of a stock. Fundamental analysis draws upon various factors surrounding a business and its performance. These can include cash flow, income statements and macroeconomic factors. Technical analysis uses a different approach. It draws upon previous trends and available data to create predictions about the future performance of a company or stock.

Time frame

The time frames of the two types of analysis are typically different. Fundamental analysis may consider the company and macro trends from a long timespan, even stretching over several years, to make predictions about stock performance. Conversely, technical analysis tends to draw on more recent data and trends. Analysts may review charts over the previous few weeks or even days to inform the decisions they make.

Related: How to do competitive analysis and what it involves

Data and tools

The data and tools each type of analysis requires are fundamentally different, leading to different insights and, sometimes, different decisions. While fundamental analysis uses materials such as company financial documents, balance sheets and annual reports or financial statements, technical analysis tends to rely solely on data trends from stock charts. As such, both types of analysis are measuring and evaluating different things.

Type of investment

Different investments can lend themselves to different types of analysis. Fundamental analysis may be suitable for long-term, steady investments, where investors consider a range of factors across a wide time frame to make decisions about their investments. Technical analysis tends to lend itself to shorter-term trading options where market trends and the analysis of recent movements in the markets can make a big difference to the success or failure of a trade. In reality, though, many investments aren't clearly long-term or short-term prospects. As such, analysts may employ a combination of both types of analysis for their trading decisions.

Related: How to become a stock trader (with job and salary info)

Advantages and disadvantages of fundamental analysis

Fundamental analysis can be suitable for analysts and investors researching certain stocks and trades, while in some situations, an alternative approach may yield more reliable results. Here are some of the advantages and disadvantages of fundamental analysis:

Advantages of fundamental analysis

One of the biggest advantages of fundamental analysis is how detailed and rigorous it is. The approach considers a varied and extensive range of factors, including company performance, financial records and various macro trends, both within the company's sector or industry and in the wider economy. Investors may favour this approach to analysis, as it can help to identify long-term trends and historical evidence that they can use to predict the future performance of a company and stock. Investors may consider fundamental analysis as a safe, reliable option when considering long-term investments and a cautious approach to trading.

Disadvantages of fundamental analysis

Owing to its detailed, meticulous nature, carrying out fundamental analysis can be a time-consuming task. This can detract from other work that investors, analysts or traders could be carrying out, and spending too much time on analysis or research could become costly. There are third-party services and research guides, that can make the research process more streamlined, though again, these may come at a cost to the investor.

Fundamental analysis can also be unsuitable for shorter-term trading patterns and investment opportunities. Due to the types of information gathered and analysed when choosing to adopt a fundamental analysis approach, it may be impossible to identify some short-term trends. This can lead to investors failing to spot warning signs or missing out on short-term trading opportunities. This can encourage traders to adopt a mixed approach to their analysis, using some elements of both fundamental and technical analysis.

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Advantages and disadvantages of technical analysis

Technical analysis can be the most suitable approach in various investing scenarios. There are some drawbacks and weaknesses in adopting a solely technical approach to your stock analysis. Here are some of the advantages and disadvantages of the approach:

Advantages of technical analysis

Technical analysis is typically favoured by traders and analysts who want to make quick decisions relating to the stock market and the performance of a particular stock. Technical analysis can reveal very short-term insights and market trends, which in turn can drive short-term investments or help traders make decisions on trades at short notice. There are also a variety of readily available, accessible reports and analysis tools, which draw on market data and allow traders to carry out technical analysis quickly and easily.

The time saved by opting to carry out technical analysis can lead to analysts being free to research a greater number of stocks and investment opportunities. Alternatively, investors can use this time to make quicker decisions and complete higher volumes of trades. This may result in smaller profits per individual trade but greater profits overall. Additionally, technical analysis evaluates price targets, allowing traders to create different strategies for meeting their investment goals. Finally, technical analysis offers insights on various factors not covered by fundamental analysis, including market psychology, sentiment and demand. This approach can help investors make better-informed decisions.

Disadvantages of technical analysis

Technical analysis can be ideal for making quick decisions and responding to recent market trends and anticipated future patterns. There are, though, some limitations to using technical analysis for your investment decisions. It's not possible to back-test some charts and reports for validity. This can lead to investors using their own expertise to manually create their own technical analysis charts, which may negate any time they would otherwise save by using prepared charts and reports. For investors seeking reliable, steady investments and requiring analysis that helps them to make fully informed decisions, fundamental analysis may be the safer option.

Technical analysis from different sources may come to different conclusions on the prospects and opportunities for a stock. This can lead to questions over the validity and reliability of technical analysis and make it appear a more risky model to adopt. Deciding to use technical analysis usually comes with significant cautions about the risks involved.

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Combining fundamental and technical analysis

While both fundamental analysis and technical analysis have their distinct advantages, it's important to consider the weaknesses of both approaches. Depending on your investment strategy, it may be valuable to adopt elements of both types of analysis when making decisions about trades and your wider approach to investment. Technical analysis can help you to take advantage of short-term trading opportunities and identify trends and warning signs that develop more rapidly than fundamental analysis can identify. Fundamental analysis can complement technical analysis by providing a foundation of market analysis, overall company performance and long-term trends to provide context to shorter-term developments.

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