Stock Investing Using Fundamental and Technical Analysis
Those serious about making money in the stock market must rely on more than just guess work or else lose their hard earned cash. Most people rely on tips or simple gossip, but this is a risky gamble which may or may not work out. It is a wise move to also know how to value stocks objectively in order to validate your tips. This will lessen the risk of buying into an overpriced or fraudulent stock. Do not wait until disaster strikes before learning how to analyze the true value of a stock.
There are several ways to invest in the stock market. Some prefer to get into a mutual fund where financial experts decide the selection and trading of stocks. Others want to just buy into an index fund to minimize risks since their portfolio is composed of a diversified group of stocks. However, those who prefer to make their own decisions generally rely on either fundamental analysis or technical analysis or a mixture of the two techniques.
The more conservative investor usually relies on fundamental analysis. Fundamental analysis tries to determine the value of a stock by assessing its assets and future income. The risks and potential of the business is also appraised along with many other financial factors like interest and foreign exchange rates. One of the most critical values for stock valuation is the price earnings ratio of the stocks.
You compute for the price earnings ratio by dividing the price with the earnings. In effect, the result tells you how long before the earnings are able to match the price of the stock. When the price earnings ratio of a stock is low compared to other companies in the same industry, the stock is considered of good value. This assumes that there are no significant developments that will reduce its future income.
The fundamental technique investor usually believes that certain stocks are undervalued due to temporary market sentiment that will eventually correct itself in time. However, since it may take a long time to bear fruit, the fundamental investor must be patient.
On the other hand, the technical analysis technique relies on attempts to predict trends. Technical analysts believe that all information pertaining to value is already factored in by the market in the stock price. Because of this, they no longer wish to exert effort in looking at a company’s profitability. They study past price movements for patterns that will enable them to forecast the future price of the stock.
In actual practice, many people combine the two techniques to maximize their chances. They may use fundamental analysis to qualify which stock to select and then utilize technical analysis to know when to buy and sell a stock.
The stock market may be a very profitable investment if you know what you are doing; otherwise, it is just a giant casino where you can lose a fortune. It is best to learn more about stock market investing before taking the plunge.
*Originally published by the Manila Bulletin. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.