What Is the Difference between Technical and Fundamental Analysis?

The key difference between technical and fundamental analysis is the source of information that is used to assess market value. Technical analysis is the study of market activity. Fundamental analysis is a comprehensive review of the company in question, including external and internal matters and data such as financial records.

There also is a difference in the kind of resources that are needed to perform technical and fundamental analysis. A small staff, or even an individual trader, can manage technical analysis because it involves merely watching the market. Fundamental analysis requires knowledge of several factors that can affect a business. It can include elements such as a review of annual reports, comparison with competitors and projection of events that could affect the success of the company. To thoroughly cover these areas, it usually is necessary to have a larger team and more robust resources.

The nature of the information collected with technical or fundamental analysis can also vary. Technical analysis is based on statistics. It considers only the current and historical performance of the entity. Fundamental analysis typically is open-ended, because it requires the researcher to make a judgment about the information that has been collected. The goal is to decide on the value of the stock based on what the trader infers from this assorted data.

Technical and fundamental analysis can include similar variables, but the way they are used to make an assessment can also vary. This typically means that the complexity of the information that is collected will differ. For example, a scandal might have a long-term effect on a company. This usually will show in the market value of the company, and that is all that would be taken into consideration with a technical analysis. In a fundamental analysis, a trader typically would analyze several elements of the scandal, including the general external and internal impact and details such as personnel changes and customer reaction.

Although it is possible to combine the techniques of technical and fundamental analysis, it is not common. Elements from each can be used to make an assessment, but the philosophies behind them are so different that it can be difficult to reach a consensus. The most probable way for the two to be combined would be that when a fundamental review is complete and a value assigned to the stock, the hard numbers of a technical analysis might help to confirm or debunk that assessment.