Fundamental Analysis and Technical Analysis

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Fundamental Analysis

Fundamental and Technical analysis are the two mainly used methods of forecasting when it comes to determining the market price of a share or a bond. Fundamental analysis has been applied in circumstances where it is easy for an investor to look into the financial ratios of a certain company or a market and use it to evaluate the financial strength, company value and the future potential of the company under consideration. The fundamental analysis, therefore, involves going through the financial figures and ratios of a company so as to acquire a clue on the strengths and weaknesses of the company.

Advantages of Fundamental Analysis

Fundamental analysis has several advantages including enabling the investor to read the history of the company thereby enabling him or her to understand the financial dynamics that are within the company of interest. Fundamental analysis also enables the investor to assess quickly whether the company is in a good state or if it has financial problems. Fundamental analysis is not free from disadvantages. Apart from being time-consuming and tedious process, the method requires finance knowledge from the investors who are looking for long-term investment interest. The analysis also suffers from extrapolation, lack of reliable market signals which can make one buy a stock at a wrong time and need to hold it for a long time.

Technical Analysis

Technical analysis involves reading stock charts and other market signals to determine the market price of a share. Technical analysis has enabled investors to decipher the movements of the stock price and therefore get some background on predicting the time when the price of the bond will change and by how much. The main advantage of technical analysis is that the investor is able to position his or her investment in a position that she or he will profit from the price movements. In technical analysis, prices never lie and the investor does not have to hold the investment for a long time. There are also a few disadvantages in the use of technical analysis. It includes the difficulty to master the reliability, accuracy of the predicted market price of a share or a bond. The analysis also suffers from subjectivity, paralysis of analysis and biased views.

August 18, 2023

Business Economics


Corporations Finance

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