Value determination methods are used to evaluate the value of an asset or a stock. However, these methods are on equal footing. Any one of these methods are not ultimate and are best used in conjunction. Depending on the risk factor and the type of trade, it’s better to employ one type of value analysis over the other.
What is Fundamental Analysis?
Fundamental Analysis mainly studies ‘price movement’ to determine stock value. Through this method, the trader measures macro and micro economic factors including supply and demand, economic strength and growth. Fundamental Analysis is used to find out both the long-term as well as short-term value of an asset or stock.
What is Technical Analysis?
Technical analysis employs the use of elements like patterns, trends, price movement, and volume to analyse trading activity in the stock market. By utilising the two key parameters namely, price movement and volume of a stock, it predicts the future potential of the stock.
Differences between Fundamental & Technical Analysis
Here is a basic chart to help you understand the fundamental differences between the two
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When it comes to your investment strategy, you don’t need to stick to only one form of investing, long-term or short term.
Which one is recommended for stock market investing?
The three types of stock analyses namely Fundamental, Technical, and Sentiment Analysis are meant for stock market investing. Each of the three methodologies are useful in their own way for understanding the ‘pulse’ of the market.
Sentiment Analysis
is a methodology of feeling the ‘tone’ of the market by studying crowd psychology. Also referred to as ‘reading the news’, or ‘reading the price action’. This is best suited for short-term trading rather than long-term investing and patience is key while choosing this methodology.
Choosing any one form of stock analysis depends on the preferences of the trader.
If you are confident in the statistics of trading signals, you can choose technical analysis. TA is also recommended for measuring and controlling risk.
Fundamental analysis may not be successful for the short term.
Irrespective of whether you are a short-term or long-term trader, a well-rounded approach that relies on both methodologies will improve your chances of success.
The Egg and Basket rule in the context of long-term and short-term investment
When it comes to your investment strategy, you don’t need to stick to only one form of investing, long-term or short term. Do a blend of both and even combine both forms namely fundamental and technical. By blending all of these together, you will come up with the right approach in your investment strategy with minimal risk and a greater chance of sustainable results.
