Basics in Equities Investing
There are basically 2 schools of thought when it comes to investing in Equities - Technical Analysis & Fundamental Analysis. What are they?
Technical Analysis (TA) is the study of historical price movements through the use of charts. The 3 main charts that most Technical Analysts use are the Line chart, Bar chart and Candlesticks. Personally, I prefer the use of Candlesticks for its more descriptive visuals. Technical analysts look for patterns in the charts and using the basic assumption that "History repeats itself" to forecast future price movements. They look for signals or indicators within graphs to tell them if a stock will continue its upward/downward trend or is heading towards a reversal. Proponents of TA will tell you that it is simple to use, signals can be quickly detected and the investor psychology is incorporated within the analysis. Some arguments against TA are that the indicators/signals are highly subjective to the user and that the value of indicative values will change over time (since they are dependent on a large number of variables)
Fundamental Analysis (FA), on the other hand, is the determination of a company's underlying value by analysing the company's financial statements, business model, its future prospects, management team and internal controls. Fundamental Analysts invest on the assumption that "an undervalued stock will always catch up to its underlying value in the future". Proponents of FA will tell you that since financial ratios such as Net-Asset-Value (NAV), Earnings-per-Share (EPS) and Return-on-Equity (ROE) are rigorously calculated, estimate of a company's underlying value will not differ too far from such tangible quantifications. Criticisms of FA are that even if the undervalued stock will rise to its underlying value, investors will never know when this will happen (via TA).
If you ask me, I suggest the use of both analysis - Use FA to identify which stocks to invest in, and use TA to determine when to do so (Timing).
Happy investing!
Labels:
Fundamental Analysis,
Investment,
Technical Analysis,
Trading
7 comments:
Hi dear, I like this entry because I agree it is about the basics of investing. Why don't you include the terminology / lingo used in T.A.? (eg: bull, bull market, bear, etc) Just a suggestion. :p
Hmmm... because there's no lingo per se dear...
Bull and Bear markets are merely descriptions of where the stock market in general is heading towards. When it is on a downward path, it is considered a Bear market. When it is on an upward path, it is considered a Bull market.
Perhaps, one of the more popular "lingos" I can think of for TA is the word "Trending". Technical Anaylst in general believe that markets move in trends. What they are analysing is whether the current trend will "continue" or "reverse" (another popular TA lingo). For example, if T-analysts expect an upward trend to continue , T-analyst will buy the stock and wait for it to trend upwards. Conversely, if they expect an upward trend to reverse, T-analyst will short the stock and wait for the stock price to fall before covering.
Wow.. so SMART! haha.. :) There's lingo, what. If you tell someone about 'bear' and 'bull', they'll think you're talking about animals.
I mean, they'll think you're talking about animals if they do not know the terms...
I meant Bulls and Bears are not lingo pertaining specifically to TA per se, but they apply to Markets in general. Hope that clarifies!
Yes yes, I know. Wrong use of word, ok? :) *POKE*
Extremely informative post on equity investing technique. It has now been easy for me to make money online through currency trading. But now I wanted to try stock options. Thanks for posting about these two important aspects that helps to identify which stock to invest.
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