Understanding the importance of the different analysis strategies
There are many types of investors. They are different in terms of age, strategies, goals, and even how they analyze risks and benefits. When it comes to the latter, there are three popular ways to explore and study the pros and cons of stock market investments, especially the long-term ones. We have technical, fundamental, and quantitative analysis. As an investor, it is crucial to learn these to make the most out of the advantages of these strategies when you pick stocks. Also, they can be very effective in becoming more profitable.
One of three: Fundamental analysis
Most investors who prefer getting long-term investments start by maximizing the use of fundamental analysis. They use it when they want to develop an idea or make sound decisions in their investments. This fundamental analysis may be relative to a company, a specific stock, or even to the market as a whole. You do this when you want to know a particular security's intrinsic value, and you do this by evaluating all parts of the business or the market concerned. Everything will be reviewed, regardless if it is a tangible asset or an intellectual property. When we say tangible assets, these are the things that we can physically see and touch, like land, buildings, equipment, and the like. On the other hand, intellectual property refers to branding, trademarks, patents, and the like.
In terms of business and companies, fundamental analysis involves reviewing everything. And when we say everything, we mean historical data, financial statements, investor conference calls, analysts' reports, analyst's forecasts, press releases, and more. We also mentioned that fundamental analysis could be applied in the market as a whole. Investors do this when they want to know the economic factors and the economy's strength. It is also done when they want to see the condition of a particular industry.
For what it's worth, fundamental analysis is helpful when investors compare the security's value in review and its current price. They can determine if the long-term investment is worth it or not.
Two of three: technical analysis
When it comes to statistics, people would always come to technical analysis. It involves market data activity such as past returns, stock prices, trade volume per chart pattern in securities movements. It can give us an idea about how the securities or the market as a whole will behave in the future. Furthermore, technical analysts, traders, and investors believe that they can do this through reviewing and analyzing charts and patterns that they get from past performance data. What sets it apart from the fundamental analysis is that it only fetches data from shorter time frames when making patterns to predict securities or market future behavior. The fundamental analysis brings data from more extended time frames. And when we say longer time frames, we mean years and years of information. Hence, technical analysis is more beneficial for traders who prefer short-term trading and investments. However, it can also be helpful to use it on long-term investments, provided that it will be used with fundamental analysis, which is perfect for long-term investments.
Three of three: Quantitative Analysis
Now, if you want to evaluate a company or a market's past performance, you can do that with quantitative analysis. Quantitative analysis is done by basic financial ratio calculations like EPS or earnings per share. It can also be done with more complicated ones such as DCF or discounted cash flow.
Doing this can give investors an idea about a security's or a market valuation or past performance. Quantitative analysis is best done with technical and fundamental analysis so that you can weigh your options when making decisions.
So, what should I use among the three?
If you have been reading
carefully, you will realize that none is better than the other. They have their
specific use. If anything, an investor must maximize using all of them at once
to become more profitable.
