Difference Between Technical and Fundamental Investing

Thursday, May 22, 2008 | Labels: | 0 comments |

There are many reasons why people decide to trade in the stock exchange. One of the biggest reasons is to get the income they earn and save to work better for them by yielding returns on investments. Nowadays more than ever before, people are finding it easier to invest in the stock market through company shares as a result of the increased awareness of the fortunes available in the stock market.

One of the very first things an aspiring trader or investor must do before attempting to invest in the stock market is to equip himself with knowledge. Some people just think I'll get a stock broker to do everything for me. This method of approach is wrong as the stock broker has other clients to attend to. The major service the stock broker renders is helping you manage your sells and buys on the stock exchange; although they could advise you on the potential benefits of buying a particular stock as against another.

One of the basic knowledge an aspiring trader, broker or investor must have is the two major forms of stock analysis. This knowledge is the root of all the necessary knowledge needed to survive and make profits in such a fiercely competitive market. After all is said and done, most finance and stock brokerage experts will tell you that these two forms of analysis is what would ultimately save the day. These two forms are known as the Technical Analysis and the Fundamental Analysis.

Technical analysis involves the manner of playing the market with assumes that non-random price patterns and trends exist in markets, and that these patterns can be identified and exploited. While many different methods and tools are used, the study of charts of past price and trading action is primary. It 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.

However this is different from what is obtainable in fundamental analysis. Fundamental analysis takes a critical look at the performance history of a company, the method of management, market share and how much profit it has made in at least three years. Also included in the indices used as measuring yardstick is its future projections and how it intends to execute all stipulated projects. The aim of all these is to ascertain the company's potential risk, make conclusions based on its present performance, and to forecast its possible profitability and increase in stock prices.

Those are the major differences between the two methods of analysis. The key is to finding that which suits you. You can use technical analysis if you plan on investing for short amount of time weeks maybe even months but not years.

Likewise you don't want to be a Fundamental investor unless you plan on investing for months and months. Some people though use the two methods when appropriate. But in all, choose what works best for you.
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