BASIC METHODS OF ANALYZING STOCKS

Now that we've touched on a few important questions to ask yourself we can get started with more details about the different stock investment strategies. Stock investment strategies can be split into two main methods: fundamental analysis and technical analysis.

Fundamental analysis: A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies).

Fundamental Analysis is that the stock market can incorrectly price stocks, but eventually the correct price will be obtained through time. The focus is in finding these undervalued companies and purchase them. In turn, they sell the stock when the stock is fully-valued or even over-valued.

Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security.

Technical analysis: A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Technical Analysis rely on charts and indicators that revolve around price and time such as moving averages, volume and relative strength of stocks just to name a few. There are way too many stock indicators to name them all here.

Technical analysis maintains that all information is reflected already in the stock price, so fundamental analysis is a waste of time. Trends 'are your friend' and sentiment changes predate and predict trend changes. Investors' emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns.

Each type of stock investment strategy analysis has it's advantages and disadvantages. There is no clear winner as to which method is the best. It boils down to your own belief more than the system. It's about what you feel is a valid reason to buy a stock. If you don't believe that a low PE ratio is a strong enough reason to buy a stock then you should not be using that type of system.

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