Moneywise24 Personal Finance

I consider long-term investing in stocks/shares as a crucial element of building wealth; in fact, you will most probably find this confirmed by most personal finance blogs on the internet. This also brings a number of interesting questions, such as how we can pick the best investment opportunities, and on what do we base our investment decisions. In the next few weeks, I intend writing a number of articles, focussed on how to analyze company stocks and investment pportunities.

Currently, there are two main methodologies for analyzing and possibly predicting the future value of a stock or share. These are:

• technical analysis
• fundamental analysis

Technical Analysis

The basic principle of the technical analysis, also called chart analysis or market analysis, is to identify potential buying or selling signals, and generally predict the future development of a stock price by its historical price and volume data. While doing this, the actual company data (e.g. annual reports, strategies, developments) as well as other economic factors are are not being involved in the technical analysis. Technical analysis is based on the fact, that particular price and volume patterns in the past have frequently been followed by a particular price and volume movement. Technical analysts attempt to identify these patterns, via the calculation of many different indicators, aiming at identifying buying and selling signals.

Technical analyses can be conducted using different time frames; long-term, mid-term, or short-term.  Additionally, technical analysis is largely based on the fact, that a stock’s price is largely determined by supply and demand of investors, irrelevant to what the actual company is worth. However, many technical analysts combine their technical findings with current macro and micro economic trends, in order to find whether these are in line with each other or not.

The topic of using technical analysis as a stock analysis method is quite controversial, as it does not attempt to involve the actual company’s performance. Many analysts swear by the technical analysis, others prefer using fundamental analysis methods.

Fundamental Analysis

The fundamental analysis is based on researching the fundamentals of the economy and the company. The fundamental analysis includes analyzing the annual reports of companies, specific ratios, the strengths and weaknesses of a company, potential development opportunities or threats, as well as macro economic developements. Fundamental analysts assume that generally the stock price reflects a company’s real performance, keeping in mind that sudden micro or macro economic news, market fluctuations, or sudden panic might let the stock deviate from its course. The fundamental analyst therefore attempts to identify which stocks are undervalued, overvalued, yearly earnings, and future potential.

Fundamental analysis is adopted by many large financial institutions, who publish their mid- and long-term view on a particular stock’s development. Also Warren Buffett used the fundamental analysis to select his stocks, or why do you think that the book “Warren Buffett and the Interpretation of Financial Statements” is about a company’s financials rather than technical analysis?

Each person will have his or her own preferences. Myself, since I aim to invest with a long-term vision and also share the idea that generally a stock will move in the direction of a company’s performance or potential, tend to adopt the fundamental analysis as my main investment strategy.

Possibly Related Posts:

• Markets Plummet As The Fear On Europe’s Debt Crisis Dominates
• Rising Stock Markets, But With Caution
• The Benefits Of Periodical And Automatic Investing In Mutual Funds
• The Top Reaon Why You Should Pay Yourself First
• Passively Investing In Turbulent And Insecure Times