Pros and cons of fundamental and technical analysis
Fundamental analysis and Technical analysis are the two famous schools of thoughts when it comes to analyzing the stock market to predict the future valuation of the stocks. You must have heard a lot about both of these techniques and their various implications but let’s discuss about the pros and cons of both of these techniques and also what they actually mean.
Fundamental analysis is the art of evaluating the intrinsic value of the stock to find the long-term investing opportunities. It relies majorly on the financial statements of the company like balance sheet, profit and loss statement and cash-flow statement. The aim is to check whether the stocks are valued below the intrinsic value of the company or not.
Every approach has its pros and cons, so here we discuss the pros and cons of the fundamental analysis:
- This process is very easy-to-use and most of us will agree with this that gathering data from the financial statements
is much more convenient.
- A common practice of all the investors is to place their bet on the company with good financial health.
- For sure this is a lengthy and time-taking process. This process involves a lot of digging of the financial statements of the company which makes it a lengthy and tiresome process.
- Making predictions for long-term investments on the basis of the historical or the past records of the company is not always considered a valid explanation.
- Demand and supply are the deciding factors for the valuation and prediction of stock prices so financial statements seem to be irrelevant in this case.
Technical analysis is the process of analyzing the charts of the stock prices to identify the trend of the stocks and predict the future valuation of the stock. The goal is to understand the demand and supply for a particular stock and to understand in which direction the stock is going in.
- The first and foremost is that it rationalizes the price you are paying for. You have a track of the stocks you have invested in.
- The price and volume also plays a crucial role in the prediction of the future value of the shares and the on-going trend.
- Precision is the outcome of this skill based technique. Usually this technique lands you with near to accurate results.
- It is a cumbersome process as it involves a lot of tracking and calculation of the market price of the stock to find the trend.
- As already said, it takes skills and a lot of experience to estimate the trends and the patterns.
- Apart from the skills and proficiencies required for this method, this method also demands previous knowledge of the company as an exception because sometimes a company with bad shares valuation