Technical vs Fundamental Analysis
Two Approaches to Stock Analysis
In the investing world, there are two dominant schools of thought for evaluating stocks: fundamental analysis and technical analysis. Understanding the differences — and knowing when to use each — will make you a more well-rounded investor on the NSE.
Fundamental Analysis
Fundamental analysis focuses on determining a company's intrinsic value. It asks: "What is this company really worth?" Analysts examine:
- Financial statements — Income statement, balance sheet, cash flow
- Valuation ratios — P/E ratio, P/B ratio, dividend yield
- Industry conditions — Competitive landscape, sector trends
- Management quality — Track record, strategy, governance
Technical Analysis
Technical analysis focuses on price action and market behaviour. It asks: "What is the market telling me about this stock right now?" Analysts study:
- Price charts — Patterns, trends, support, and resistance levels
- Indicators — Moving averages, RSI, MACD, Bollinger Bands
- Volume — Confirming the strength of price movements
- Momentum — Speed and direction of price changes
When to Use Each
Fundamental analysis is best for long-term investment decisions — choosing which stocks to own. Technical analysis is best for timing — deciding when to buy or sell. Many successful NSE investors use both: they pick fundamentally strong stocks like Safaricom (SCOM) or Equity (EQTY) and then use technical indicators to time their entries and exits.
Combining Both Approaches
The most effective strategy often combines both methods. For example, you might use fundamental analysis to identify KCB as an undervalued banking stock, then use technical analysis to find a favourable entry point by waiting for the RSI to signal oversold conditions or for the price to bounce off a key support level.