Stock investing strategies

Stock investing strategy-Fundemental investing

FUNDAMENTAL INVESTING

As mentioned in the earlier posts, fundamental investing is all about investigating the financial health of the company and its competitive advantages. The financial health is judged by analysing the earnings growth, revenues, debts, quality of management, profitability ratios, cash flow etc..Apart from company specific data, they would also study the macro economic factors that affect the company.  Once the financial position of the business is satisfactory, the fundamental analyst would do a process called valuation and based on the results he would proceed to fix a value for the company’s share. This value would be taken as the benchmark for judging whether the stock is undervalued or not. Fundamental analysts believe that when the overall markets decline, fundamentally good stocks also decline below what it’s actually worth giving rise to investment opportunities.

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Technicals vs Fundamentals.

“Before you invest, investigate.” William Arthur Ward (1921-1994) author, educator

Two schools of thought.

Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. Technical analysis looks at the price movement of a stock using chart and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at various economic factors like Balance sheets, income statements, ratios etc and tries to figure out companies worth investing in. Our section on financial ratios and value investing intends to cover fundamentals.

An investor who follows the fundamentals tries to find the ‘actual value’ of a company and invests when the market price is lower than the actual value. Technical investor believes that all the fundamentals factors are accounted for in the current stock price and hence there is no need to further investigate into the fundamentals. Hence, they look out for the trends using price charts and volume analysis. Basics of technical analysis are covered in our technical analysis sections.

Who is right?

A common dilemma facing anyone who invests in the stock market is whether one should buy shares based on the fundamentals of the company, or one should follow the momentum of stocks as indicated by technical analysis.

Fundamentals are very important. Without fundamentals the markets would not move. Fundamental analysis focuses on understanding the underlying enterprise – which involves analysing a company’s financial statements, management competence, market share, competitors…etc – and then valuing its shares based on an estimate of the future cash flows it could generate. i.e. Fundamental analysis uses historical and current data to estimate future stock returns and takes into consideration economic data releases, events such as political elections as well as individual company announcements that causes the prices to move up and down or stay the same.

Technical analysis focuses exclusively on the study of market action. Technical analyst assumes that all of this information is already included into a stock’s price, so all a trader has to do is find out trends in share price movements and volumes to make speculative decisions. Technical analysis studies prices and volume by utilizing charts whereas fundamental analysis is more concerned about whether the company is a sound enterprise to invest in.

What should you do?

  • If your intention is to invest for a long period, say 5 years or more, value or growth or GARP investing strategy would work perfectly for you. All these strategies use fundamental analysis as its base.
  • If your intention is to make as much profit as possible from your investments over a short period of time, say 1 year, then you need an investment strategy that takes into account both the fundamental soundness of a business as well as the expected movement of the shares of the company over the near term. Fundamental analysis would help you to spot companies that are doing well and technical movement of its share price would help you to predict the movement of shares over the near future.
  • If your intention is to invest for a very short period, better rely on the technicals of fundamentally good companies. When you look at the markets through technical eyes, you can quickly spot changes in direction that aren’t obvious in fundamental terms.
  • The more longer the time frame, the more you rely on fundamentals.

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