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There are a number of advantages and disadvantages when it comes to the use of both the technical and Fundamental analysis methods of predicting the price of a share. Technical analysis is a reliable technique for predicting the market price of a share but one has to spend more time to learn and make use of it. Technical analysis, on the other hand, can objectively give better results when it used without distorting the information of the interested company so as to derive the maximum market value from the analysis (Drakopoulou, 2016, np.). Technical and fundamental tools therefore suffer has the following specific pros and cons.
Advantages of Fundamental Analysis when buying Shares or Bonds
The fact that Technical analysis makes use of analytical methods and approaches in forecasting the price of a share eliminates the room for bias which might be witnessed technical analysis (Petrusheva and Jordanoski, 2016, pp. 26).
Fundamental analysis gives the investor a broader focus because it considers a number of factors such as technological changes, long-term economic conditions, consumer trends and demography to predict the price of shares (Petrusheva and Jordanoski, 2016, pp. 26).
Fundamental analysis uses a systematic approach of analytical and statistical tools which helps in accurately deducing and arriving at the value of shares so that an appropriate buy or sell recommendation can be given (Petrusheva and Jordanoski, 2016, pp.26).
Since fundamental analysis involves figures arrived at through rigorous financial and accounting analysis, the technique provides a better understanding to the investor about the company and hence in gauging the prices of shares (Petrusheva and Jordanoski, 2016 pp.26).
Disadvantages of Fundamental Analysis when buying Shares or Bonds
Fundamental analysis is a time-consuming process which involves financial modelling, industry analysis and valuation which are often complicated and require a lot of effort to start and work (Petrusheva and Jordanoski, 2016, pp 27).
There a number of assumptions centric associated with the analysis of the fundamental method where the assumptions appear to form a vital part of the forecasting of the share prices. This makes the method inappropriate when there is an occurrence of unexpected political, economic and legislative changes which negatively affects the value of the company (Petrusheva and Jordanoski, 2016, pp. 27).
Advantages of Technical Analysis when buying Shares or Bonds
Since Technical analysis is based on trends, it gives more insights on what is expected when it comes to the demand and supply sides governing the stock market. The trends also give sentiments to traders about the performance of a certain company’s shares in the market where high demand tends to push the prices high while high supply lowers the prices. Trends actually enables the investor to judge the overall market of the shares (Bonga, 2015, np.).
Technical analysis, unlike fundamental analysis, provides the investor with current information regarding the value of a certain company. This gives a room where one is able to reflect the price of the share with the information known about the company assets or customers. Because media information on a company can lead to increase or decrease in the share price, the ultimate current price of the shares will be affected by technical analysis (Bonga, 2015, np.).
Technical analysis provides the investor with all the necessary timing information on when it is necessary to enter or exit the game. The timing advantage of technical analysis gives a right signal on when to trade. Unlike fundamental analysis where a company's stock is also predicted using historical figures, technical analysis enables one to invest the funds in other investments until when the stock has moved higher up (Bonga, 2015, np.).
Disadvantages of Technical Analysis when buying Shares or Bonds
In technical analysis, there are too many indicators which might spoil the trend charts hence confusing the investors by signalling a good performance which affects the analysis.
The technical analysis ignores the underlying fundamentals of the company which is a long time frame may prove risks that are not revealed by technical techniques (Forexfraud, 2018, np.).
To sum up, it evident that fundamental and technical analysis techniques can both serve as the best tools for analyzing market directions of the shares. If the techniques can be used together with knowledge and discipline that it requires, it can give best results.
Bonga, W. (2015). The Need for Efficient Investment: Fundamental Analysis and Technical Analysis. SSRN Electronic Journal.
Drakopoulou, V. (2016). A Review of Fundamental and Technical Stock Analysis Techniques. Journal of Stock & Forex Trading, 05(01).
Forexfraud. (2018). Fundamental Analysis vs Technical Analysis. [online] Available at: https://www.forexfraud.com/learn-forex-trading/fundamental-analysis-vs-technical-analysis.html [Accessed 3 May 2018].
Petrusheva, N. and Jordanoski, I. (2016). Comparative analysis of the fundamental and technical analysis of stocks. Journal of Process Management. New Technologies, 4(2), pp.26-31.
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