If you want to make money in the stock market and you’re the patient type, then you want to focus on fundamental analysis. If you’re not the patient type and you desire fast money, then you want to focus on technical analysis. The differences between the two are covered below.
Fundamental Analysis Investing
When you’re playing the long game, you want to do your own due diligence to figure out a company’s intrinsic value. Once you figure that out, you can determine whether or not the stock is on sale. However, this is where the twist comes in. The company’s stock price should not matter. For example, let’s rewind many years. If Amazon hit a new high of $101 per share, imagine you didn’t buy because the stock was expensive. The following is the key that many people miss in that the winners keep winning. If you’re thinking of investing, as in holding a position for at least one year, then you want to ignore the stock price completely and invest in the company.
When you invest in the company, the stock price will work itself out over the long haul. Even if the stock takes a hit, you’re likely going to be receiving dividends if you invested in a high-quality company. Even if that’s not the case, you can dollar cost average, which means buy more shares at a cheaper price, thereby increasing the value of your investment. The price of a stock is primarily based on human psychology. If the masses believe the company is a winner, the stock will move higher. If not, it will move lower. The best situations are when human psychology drives the price of a good company down. That’s a sale. This is also why Warren Buffett says: “buy when there is blood in the streets”. It has worked out well for him as he currently has a net worth of $79 billion.
Contrary to popular belief, the easiest way to figure out if a company is a winner or not is to see if consumers like that company. For instance, consumers love Costco. Therefore, you don’t need to look at their numbers. It’s recommended, but it’s not necessary. As long as the mass consumer attitude is positive, the stock will continue to move higher. If you choose to dive into the numbers, always look at the 10K and 10Q reports, not press releases.
Technical Analysis Trading
If you have no interest in the phycological side of the game and would prefer to use charts and aim for faster money, then technical analysis and charting is more your style. The irony is that charting is also based on psychology, but indirectly. With this approach, you’re using movements in price and volume to determine your positions. You might use simple moving averages, otherwise known as SMA. If the average daily price over a short period of time crosses over the average daily price over a longer and fixed period of time, it can act as a buy signal.
Support & resistance are also a big part of TA. If a stock takes a hit and reaches a point where buyers usually jump in, that’s support. You want to buy. If a stock moves higher and reaches a point where sellers usually exit, you want to sell. Those are just the basics. You will also use trend lines, Bollinger bands, Chaikin Money Flow, stochastics, and more.
