Fundamental vs Technical Analysis: How do retail investors choose?

As a retail investor, is fundamental analysis or technical analysis better suited to you?

Sep 16, 2020 07:09 IST India Infoline News Service

Mutual Funds Analysis
To analyze a market’s movements, investors — be it individual or institutional — use three types of tools. These are fundamental analysis, quantitative analysis, and technical analysis. By understanding the differences, between technical, fundamental, and quantitative analysis, any long term investor gives themselves access to three really valuable stock picking strategies that can be used to make profitable investment decisions. First, let’s dive into the differences between these three strategies.

What are the types of stock market analysis?

The purpose of fundamental analysis is to figure out a fair valuation for a particular company. This is done by evaluating all aspects of the business, the market as a whole, the industry, and the global and domestic environment. With technical analysis, the idea is to evaluate the stock market’s data such as price to book ratio, historical returns, future price movement, and more for the market as a whole. Quantitative analysis by using the simple financial ratio calculations helps gain insight into a certain company or broader market.

What style should retail investors use?

There is no one strategy that is always better than the rest. The use of each analytical style depends upon the situation. Hence, the average retail investor will ideally use a combination of technical, fundamental, and quantitative analysis when they are evaluating a company’s growth potential and general profitability. Here are the different ways in which you can learn when to use each of these strategies.

When to use Fundamental Analysis:

Retail investors will normally employ the usage of fundamental analysis when they simply want to assess their long term investment decisions. This is for the reason that fundamental analysis helps estimate the security’s intrinsic value by looking at all aspects of a business or market. One uses fundamental analysis when they want to look at the broader source they are putting their money into. They carefully assess and, equipment, building, and other tangible assets owned by the company. Intangible assets such as patents, trademarks, branding, and intellectual property are also viewed.

One more situation in which fundamental analysis comes handy is when a company has just out their IPO, without a long history of investments. The IPO is a pitch from the company with the goal of attracting fresh investors so the valuation of their stock grows. During this scenario, without enough data available to conduct a technical analysis of the company’s performance, investors look at the company itself. This means conducting fundamental analysis of tangible and intangible assets. To properly carry out this style of analysis, it is important to review press releases, conference calls, financial statements, historical data, and analyst estimates.

When to use Technical Analysis:

Evaluating securities via the use of statistics available on the company’s history of stock market performance is known as technical analysis. Technical analysis employs the use of data such as a company’s historical returns, the volume of trades, stock prices, and more. The goal is to chart a pattern in the movement of securities. The goal with fundamental analysis is simply to show the intrinsic value of a share in a certain market. Technical analysis can help in gaining insight into future moves of the securities as a whole.

Hence, retail investors will benefit more from technical analysis after they have already estimated the quality of a company through fundamental analysis. Technical analysis will yield a rather specific estimate of future performance. Hence, investors who use this strategy strongly believe that the future performance can be estimated by reviewing performance data of the past. One can get a deeper understanding through this style of  analysis after doing a broader review of the fundamentals. This is because the technical style of analysis looks at shorter bursts of time to develop future patterns, while fundamental analysis relies on information that could span years or decades.

Conclusion

Both styles of analysis are important to estimate the stock of a company, and whether it is worth investing in. Retail investors employ a combination of fundamental and technical analytics to gain this insight. In certain situations, one style trumps the other, as specified above. However, both styles complement each other and an investor would be missing out if they simply replied on one method of analysis only. These strategies can be really helpful to investors in estimating the quality of long term investments.

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