In the world of stock investing there are two major schools of thought. There is the fundamentalist who believe that the investment price of any trade vehicle is foreshadowed by its basic business dealings. A company that earns more money today than it did yesterday with the same growth opportunities should be worth more in price per share. The other camp is the technical investors and traders. They believe that everything that could possibly be known about a stock at any given time is already reflected in the stock price so the primary reason a stock price changes is the emotions of the people who buy and sell.
Are you a Fundamentalist?
Do you enjoy reading through business plans, quarterly reports, market trends, earnings forecast, and learning about how successful businesses are ran. Then you might be a fundamental investor. When you are looking for bargains (or over priced companies if you are going to short) than you need to compare companies to how they are performing against other companies running similar business models. You don’t have to buy the best ran company, but the best ran company compared to its market valuation.
Are you a Technical Investor?
Do you enjoy watching the market live as the price is changing? Watching charts and graphs and following the trade magazines and popular news to understand what people are finding “hot.” As a technical trader you’ll use tools like sentiment indicators, price movements, buying volume, and resistance and support levels to determine when a stock is overbought or oversold. While this type of investing is generally considered trading rather than investing, many successful investors employ some of these tools in their strategies.
Blend them Together
In reality both of these styles are valid and have purpose. If a company is growing at a phenomenal rate than the resistance levels that the technical traders are watching will get destroyed as real investors rush to buy the deal. On the other hand a solid, growing company can take years to return your investment if you buy in the middle of the hype. While most of us lean harder on one style versus the other, there is no reason in today’s age of information to not utilize all the tools available to you.
Today’s investor no longer has the ability to just purchase a company and forget about it for life. Global competition is fiercer and corruption at corporate and government levels is a reality. They need to be investing with a plan that monitors a company’s true long term potential and the sentiment of the average investor to earn a return that’s worth their effort. You can get a lot more information on investing for free from Investopedia.