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(JPMNT) Journal of Process Management – New Technologies, International

Vol. 4, No.2, 2016.

COMPARATIVE ANALYSIS BETWEEN THE FUNDAMENTAL


AND TECHNICAL ANALYSIS OF STOCKS

Prof. Nada Petrusheva Ph.D


FON University – Skopje, Republic of Macedonia
natka.petrusheva@fon.edu.mk
Igor Jordanoski, MSc
FON University – Skopje, Republic of Macedonia
igor.jordanoski@fon.mk

Abstract: In the world of investing and trading, in stock price movements repeat themselves
order to have a definite advantage and constantly and can determine the best times for you to
create profit, you need to have a strategic approach.
Generally speaking, the two main schools of thought
buy and sell.
and strategies in financial markets are fundamental
and technical analysis. Fundamental and technical 2. Differences between the fundamental
analysis differ in several aspects, such as the way of and technical analysis
functioning and execution, the time horizon used,
the tools used and their objective. These differences
lead to certain advantages and disadvantages of each • The way of working
of the analyses. Fundamental and technical analysis Fundamental analysis attempts to calculate
are also a subject of critical reviews by the academic
and scientific community and many of these reviews
the future value of a share through various
concern the methods of their application, i.e. the economic variables, known as
possibility of combining the two analyses and using fundamentals. The analysis consists of
them complementarily to fully utilize their strengths studying the economy as a whole, the
and advantages. industry in which the company operates and
Key words: fundamental analysis, technical the company itself. The basic premise of
analysis, investing, value investing, trading
this analysis is that in the short term, the
share price does not correspond to its value,
1. Introduction but in the long run it will correct itself. You
Fundamental analysis is used to calculate can make a profit by buying shares at a
the true intrinsic value of a share and to find lower price than their true value or by
opportunities where that share value differs selling shares at a higher price that their
from its current market price. In order to do actual value.
this, fundamental analysis looks at The main task of fundamental analysis is to
economic factors, known as fundamentals. determine the true value of a share.
These fundamentals are mainly found in the Whoever performs the analysis should
company’s financial reports, as well as consider the overall performance of the
reports about various macro-economic company and its financial statements,
indicators and variables. Fundamental including all the latest news about the
analysis is based on the assumption that company. Based on all that, he should
there is a time delay in the affecting of conclude whether the market properly
share prices by these fundamentals. evaluated all the information into the share
Technical analysis is used to predict the price. The investor needs to consider all
future market price of a share using parts of financial statements, including
statistics on the past performance of that profits, assets, revenues and expenses, make
share. Technical analysis takes into account a comparative analysis by year, make a
the past changes in the price of a share and comparative analysis by certain industry
attempts to predict its future price standards, notice certain trends in their
movements and changes. Technical analysis behavior and based on all that, make proper
is based on the assumption that patterns in valuation of the shares. After all, stock

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(JPMNT) Journal of Process Management – New Technologies, International
Vol. 4, No.2, 2016.

prices are inevitably dependent on all these that shows that there is a growing trend,
numbers and only through their analysis, which will continue after a small pause and
the investor can understand how prices “double tops and bottoms”, a pattern that
react to certain changes in the company’s suggests a changing trend. Technical
financial performance. analysis also uses moving averages. They
The best worldwide example of an investor level the short-term price fluctuations and
who applied fundamental analysis is the also help in the detection of ascending and
renowned Warren Buffett.1 He is also descending trends. Levels of support and
known as the Oracle of Omaha because he resistance are another aspect that can be
is from Ohama, Nebraska. He used value analyzed by moving averages. For example,
investing, i.e. invested in shares he thought if a share is in a downward trend, when it
were undervalued, and waited, sometimes reaches the level of support of a long-term
even for a long periods of time, for the moving average, it will probably change its
prices to increase to their expected level. direction.2
Technical analysis attempts to predict the These differences are due to the basic
share price in the future. It does not deal principle in which fundamental analysts
with all the economic factors that may believe, which is that the shares are not
affect it, but only with the share price’s correctly valued by the market at any given
movements. Additionally, for the technical moment. Technical analysts consider all
analyst it does not matter what is the real external factors instantly reflected into the
value of the share, but only what are the share price, as opposed to fundamental
price patterns created by supply and analysts, who believe that it takes some
demand and what insights we can get from time for it to happen. Therefore, there is an
them. The purpose of technical analysis is opportunity to make profits in the time
to forecast the stock price in order to when the price has still not reflected every
establish favorable moments for buying and available company-related information in it.
selling stocks. The nature and methods of the technical
Technical analysis is based on the premise analysis make it useful for short term
that all the important fundamental factors trading and therefore, it is used mostly for
are already reflected in the share price. trading purposes, while fundamental
Accordingly, it focuses only on the share analysis, on the other hand, is mainly used
price and trading volume, which are for investments.
measured and presented at various tables
and graphs. By analyzing these graphs, the • Time horizon
investor can obtain information about Fundamental analysis uses longer periods
certain trend formations and regularities in when analyzing stocks than technical
the price movement, the trading volume and analysis. Technical analysis uses relatively
their inter dependence. One of the more short periods, that may be days, weeks or
popular charting tools is the candlestick months, while fundamental analysis uses
chart, named because it resembles a candle. periods of several years.3
The figure for each trading period is plotted Therefore, that implies that the fundamental
to show the high and low prices for the analysis is used by investors who are trying
period, along with the opening and closing to pick stocks whose value will increase in
prices. The most common types of price the future, over several years. They believe
patterns are:“head and shoulders”, which that if they have chosen the correct stocks,
shows that after its formation, the price will their price will eventually rise, even if it
start moving in the opposite direction of the takes several years for that to happen. In
previous trend, “cup and handle”, a pattern
2
“Fundamental analysis versus technical analysis”,
1
Kumar, R. (2014): How technical and fundamental from www.diffen.com
3
analysis can help your trading decisions, RKSV B&R Beurs, www.bnrbeurs.nl
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(JPMNT) Journal of Process Management – New Technologies, International
Vol. 4, No.2, 2016.

contrast, the technicians are trying to find • Trading vs. Investing


stocks that they can trade in the short term, The time difference between fundamental
i.e. stocks whose prices will experience and technical analysis is seen not only in
significant changes in the coming days or their short-term or long-term approach, but
weeks. also in their purpose. In general, the
The different investment styles purpose of the technical analysis is trading,
implemented by investors who use and the goal of fundamental analysis is
fundamental and those who use technical investment. Fundamental analysis is
analysis lead to different time frames in primarily used by investors who buy and
their analyses. As we know, the hold stocks for a period of time, while
fundamental analyst estimates the real value technical analysis is most frequently used
of the share, but that value will become its by traders looking to make short-term
market price after a certain time has passed. profits. Investors buy certain stocks because
It is this way of investing that is known as they believe that their value will increase in
value investing. If the market reflects all the future, while traders buy certain stocks
share-related changes momentarily to its because they think they will be able to sell
price, then the value investing and the them at a higher price in a relatively short
fundamental analysis itself would not be period of time. Sometimes, this difference
possible. In addition, the data used by may not be so clear, but there is certainly a
fundamental analysts is not published daily distinct approach between these
as is the case with the data on price philosophies. They certainly seem similar
movements and trading volume, but is and generally use the same idea and
published on a quarterly or annual basis. concept, but they are essentially different
Sometimes, financial statements are schools of thought.5
published only annually, while the price
data is available almost instantly. 3. Advantages and disadvantages of the
• Charts vs. Financial statements fundamental and technical analysis of
Fundamental analysts have the financial stocks
statements as the main source of The first advantage of fundamental analysis
information, while technical analysts use is that it examines real economic and
charts with price movements as the almost market factors in assessing the value of
only source of data. The fundamental stocks. With fundamental analysis, you
analyst estimates the intrinsic value of the seek to understand trends in the economy,
stock by analyzing the income statements, business sectors and companies to
balance sheets and the statements of cash determine if stocks are priced fairly given
flow. In this approach, the investment the prevailing economic conditions. You
decision logic is simple – if the stock trades begin your analysis by examining the
at a price lower than its estimated intrinsic economic outlook to determine which
value, than it’s a good investment. industry groups are likely to benefit.
Fundamental analysts use however more Understanding the group is as important as
complex information in their analysis, not picking the industry leaders – the top firms
only the data found in the financial in a stagnant or declining industry are not
statements. On the other hand, technical going to be wise picks. The analysis
analysts believe that all you need to know concludes with studying the leaders in the
about a stock can be found within the stock rising industries, looking at key statistics,
price’s charts.4 management and the business plans.

5
Warneryd, K.E. (2002): Stock market psychology:
4
B&R Beurs, www.bnrbeurs.nl How people value and trade stocks, E. Elgar Pub
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The second advantage of fundamental and he makes his trading decisions in


analysis is the fact that stock prices are accordance with this assumption. As we
determined by the companies performances have said before, the main goal of technical
and their prospects to make a profit. analysis is to find specific price trends in
Therefore, if you make accurate forecasts the market. A typical example would be if
and predictions about future profits, it is the analyst notices that whenever a
likely that the valuation of the market prices particular stock declined 4-5%, in the
of shares will be relatively accurate. following period, it had experienced sharp
The third advantage of fundamental upward movement. This knowledge leads
analysis is the economic logic and viability the analyst to a trading signal –when the
of the investment criterion, which is that a price falls by 4-5%, he can now buy the
share is a good investment choice when its stock and make a profit from the expected
market value is lower than its true intrinsic price increase. Traders and technical
value, i.e. when it is undervalued and vice analysts are constantly looking for signals
versa, the share is not recommended for of these kind, which can then be used to
buying when its market value is higher than achieve short-term profits.
its true intrinsic value. The second advantage of technical analysis
The main weakness of fundamental analysis lies in the fact that there are a number of
is that it is time-consuming. You cannot computer tools and programs that facilitate
quickly locate and absorb the information the analysis. Unlike fundamental analysis,
you need to make thoughtful stock picks. where it is not simple to investigate certain
Your judgments are subjective, as is your factors such as the potential for future
definition of fair value. You may need to growth of the company and the industry and
use different criteria to evaluate different branch situation, in technical analysis, by
industry groups, which will also be time- simply entering the necessary parameters in
consuming. the corresponding computer program, you
The second drawback of the fundamental can get certain investment signals. Of
analysis is in relation to the efficient market course, financial and investment
hypothesis. Since all information about understanding and skills are required to
stocks is public knowledge – barring illegal interpret these signals and take appropriate
insider information – stock prices reflect actions.
that knowledge. If stock prices are based on The third advantage of technical analysis is
all known information, then they can that it excludes the subjective aspects to
neither be undervalued nor overvalued. But certain companies, such as the analyst’s
information flows are imperfect, and if your personal expectations. The final decision is
exercise due diligence, you will be more based solely on what the results of the
successful than those who do not.6 graphs suggest. Furthermore, the technical
A major advantage of technical analysis is analysis helps making time decisions, i.e.
its simple logic and application. It is seen in what is the right time to buy or sell certain
the fact that it ignores all economic, market, shares.
technological and any other factors that The main drawback of the technical
may have an impact on the company and analysis is that it has no academic or
the industry and only focuses on the data on scientific confirmation and it can’t be
prices and the volume traded to estimate validated by any rational arguments. Critics
future prices. After the emergence of a of technical analysis compare it to reading
particular pattern in the price movement of tea leaves. There is nothing, they say, about
the stock, the technical analyst assumes that a chart formation that necessarily makes a
this pattern will be repeated in the future stock move in a predictable manner. On the
other hand, if enough followers believe in
6 the predictive power of the chart, they will
Knapp, S.P.V. (2008): Sensible stock investing:
How to pick, value and manage stocks, iUniverse
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engage in the buying and selling activity 5. Combined use of the fundamental
that will make the prediction come true. and technical analysis
Technical and fundamental analysis are
4. Criticism toward the fundamental seen as total opposites in the world of
and technical analysis investments. However, many investors and
Some critics see technical analysis as a traders have managed to combine them and
form of black magic. In fact, technical achieve successful results. Investors who
analysis has only recently begun to enjoy apply mainly fundamental analysis, can use
some mainstream credibility.7Most of the technical analysis to determine the exact
criticism towards technical analysis derives time when to make a transaction, whether
from the economic theory, i.e. the efficient it’s buying or selling. Since technical
market hypothesis. According to this analysis is primarily a market timing tool, it
hypothesis, the current market price of a can be implemented effectively in
particular share is always the accurate price conjunction with fundamental analysis. The
because it has already calculated in it all the proper assessment of the time to enter into
information available that may have the investment opportunity can sometimes
influenced the share, hence, questioning be more important and the investment itself.
any analysis that claims to have found Therefore, the best advice would be to
undervalued stocks in the market. There are study the fundamental factors, make the
three levels of this theory. The weak-form investment decision and use the technical
efficiency assumes that all historic price analysis to determine the time of purchase
movements are already reflected in the or sale.
share price, hence the analysis of such price On the other hand, investors who use
movements can’t lead to predictions for the mainly technical analysis, in some cases
future price patterns. However, it remains can benefit from fundamental analysis. If a
possible that through fundamental analysis technical analyst detects certain price
you can find certain fundamental factors, pattern and determine that some particular
that could influence the future share price. stock is a good investment, he can further
The semi-strong efficiency reduces the confirm his assessment by analyzing some
contribution that fundamental analysis can important fundamentals of the company,
have in selecting stocks for investing. The which can provide valuable information
strong form efficiency states that all the about its financial position and its capacity.
existing market information in connection This suggests that the fundamental and
with the share and with the company is technical analysis differ between each
already taken into account and therefore, other, but they are not necessarily mutually
neither technical nor fundamental analysis contradictory. In general, the proponents of
can help you find and detect favorable both technical and fundamental analysis are
investment opportunities.8 Many academics not big advocates of the idea of combining
believe in some version of the efficient them. However, it is undeniable that there
market hypothesis, therefore, questioning are certain advantages in combining them
the credibility of both the technical and or at least having a deeper knowledge of
fundamental analysis. both types of investment strategies, since
technical and fundamental analysis are the
most important and the most powerful tools
in the realm of finance and investing.

6. Conclusion
7
Schabacker, R.W., Mack, D. (2005): Technical We have seen that the fundamental and
analysis and stock market profits: A course in
forecasting, Harriman House technical analysis are different in many
8
PCM Brokers, www.pcmbrokers.com aspects, starting from the assumptions on
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(JPMNT) Journal of Process Management – New Technologies, International
Vol. 4, No.2, 2016.

which they are based, to the methods used 7. References


and the function they have. These [1] Knapp,S.P.V. (2008): Sensible stock investing:
differences show that the fundamental and How to pick, value and manage stocks,
technical analysis are essentially different iUniverse
strategies for making investment decisions. [2] Kumar,R. (2014): How technical and
fundamental analysis can help your trading
However, the observed differences don’t
decisions, RKSV
necessarily indicate that fundamental and [3] Schabacker,R.W., Mack, D. (2005):Technical
technical analysis lead to different analysis and stock market profits: A course in
investment decisions. In fact, both analyses forecasting, Harriman House
have their advantages and disadvantages [4] Warneryd,K.E. (2002): Stock market
that can be combined to give optimum psychology: How people value and trade stocks,
Edward Elgar Pub
results.
[5] Fundamental analysis versus technical analysis,
from www.diffen.com
[6] B&R Beurs: www.bnrbeurs.nl
[7] PCM Brokers: www.pcmbrokers.com

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