|
|
What is Fundamental Investing and how it works?
|
What is Fundamental Investing?
Simply put, fundamental investing is the process of analyzing a stocks’ ability to be profitable. When an investor takes the fundamental analysis approach when investing, they are practicing fundamental investing. Fundamental analysis is simply a method of selecting stock that involves conducting intensive research of the stock’s accounting statements and SEC filings prior to making a decision about whether to purchase stock in a particular company.
Fundamental investing via the fundamental analysis approach is almost the exact opposite of another common approach to selecting stocks, which is known as technical analysis. Whereas fundamental investing attempts to make a determination about as to whether or not a company will continue to be profitable and if the company is financially sound, the technical analysis model looks almost solely at the stock’s historic performance and makes an attempted prediction about how the stock will perform in the future, based on its past. Many times the fundamental investing approach and the technical analysis approach will be combined. In these instances, the fundamental investing approach will be used to select a stock and the technical analysis paradigm will be utilized to determine when the stock will be purchased.
Fundamental Investing Approach
In a nutshell, fundamental investing involves attempting to determine whether or not a particular stock is a good investment. With the fundamental analysis approach, an investor looks at how well the particular company is performing from a purely financial standpoint. Investors using the fundamental investing approach may ask questions about the company’s earnings, growth, the ratio of the price of stock when compared to the earnings of the stock per share, and the stock’s price earnings ratio when compared to companies that are similar in nature.
Ease of Understanding Fundamental Investing
Moreover, the fundamental investing approach looks to answer some very basic questions about the company’s financial health. This type of investing is typically thought of as a conservative approach to selecting stocks, especially when compared with the technical investing method. It is also said that the fundamental investing model incorporates more exact science than the technical model. The calculations in fundamental investing don’t require rocket science. For example, to calculate the price earnings ratio, one need only divide the price of the stock by the earnings for each share. One can determine the book value of any company from the company’s official financial statements. Earnings can be calculated with ease using the company’s public financial records.
Technical Analysis is Complex
By contrast, the formula for analyzing a stock using the technical analysis model is very complex and involved, and requires the investor to make a judgment call in most instances, as they will be trying to predict behavior. On the other hand, when using a fundamental investing approach, all that the investor is really trying to find out is if a company is profitable and will they continue to be. In the fundamental investor’s scheme of things, the short term price of a stock is not as important as whether or not the company is earning and will continue to earn. After all, if this is true, then the stock price is set to go up. The technical model of analyzing stocks is more concerned with the price movements of stock over a short period of time.
Fundamental Investing or Technical Analysis?
No matter which looks best to you – fundamental investing or taking the technical analysis approach – one thing is sure. Investing in the stock market is always more profitable if you use a systematic approach. Fundamental investing is easier for the masses to understand and employ in the stock selection process, and may be a better option for novice investors than the technical analysis model, which is harder to understand and put into practice. Both of these models have their own unique strengths and drawbacks, so choosing the right one for your investment strategy should be based on your level of comfort.
Related article: Best brokerages for long-term investors in 2012
|
|
|
|
|