Fundamental Analysis or Technical Analysis ? Which is more effective to profit from Stock Market ?

Fundamental Analysis : 

Fundamental Analysis attempts to measure a stock's intrinsic value by examining related economic and financial factors, which can be both qualitative and quantitative in nature. End goal of fundamental analysis is to derive a value for a stock which can be used to determine whether presently stock is undervalued or overvalued for investment decision.

• Fundamental analysis uses revenues, earnings, return on equity, promoter share holding, profit margins and other data to determine a company's underlying value and potential for future growth

• Fundamental analysis may also use discounted cash flow models and various other models to arrive at intrinsic value. Comparison with peer companies in the same sector and macro analysis of broad economy is also sometimes included

• Fundamental analysis is subjective in the nature in the sense that every person may perceive VALUE differently for the same stock

• One of the limitation of fundamental analysis is that it takes into account only information in public domain and within the perception of person performing the same. Eg. If government of china enacts stricter environmental rules for chemical companies then the same can have favorable impact on chemical companies in India. Person performing fundamental analysis must have a wider perception to include most of the information that is likely to impact intrinsic Value

• Fundamental analysis assumes that markets are not efficient and there is possibility to derive profit due to mismatch between present value and intrinsic value. In spite of all the clarity that fundamental analysis brings in, it alone is not enough to arrive at the timing and extent of investment/trading decision

Technical Analysis : 

Technical analysis assumes that all information studied by fundamental analysis is already reflected in the PRICE of given stock. It is a method employed to evaluate stocks by analyzing statistical trends gathered from trading activity, such as price and volume. 

• In technical analysis historical data of stock is used to understand pattern of price movement and to evaluate stocks strength or weakness on the basis of the same.

• Technical Analysis has 3 major assumptions :

1. Price moves in Trend
2. Patterns tend to repeat 
3. Everything is factored in the PRICE

• Technical analysis is of great assistance for timing the entry and exit in investment or trading decision.

Intersection of Fundamental and Technical Analysis : 

For investment decisions it will make a lot of sense to COMBINE fundamental analysis and technical analysis. Fundamental Analysis will take care of the aspects which will help one arrive at intrinsic value and technical analysis will help one arrive at the timing at which entry and exit decisions can be made.

One must have observed or experienced that many a times you would have identified a very good fundamental company and taken a long position but the stock does not move at all for long periods of time. You may eventually exit and stock moves or stocks does not move for a few years and then suddenly moves. If support of technical analysis is taken then it is possible for one to know whether longer term trend of a stock is positive or not. Likeliness of a stock to move up is higher if stock is in uptrend and fundamentals are also good !