There are many different approaches to choosing stocks. Each comes with advantages and disadvantages, so you should try to find the approach best suited to your own financial situation and goals.
This is an attempt to use price charts and other mathematical indicators to predict future price movements of a stock. Technical analysts don’t look at any outside factors, such as the company’s financial statements or the overall economic outlook. It’s strictly by the charts. Market technicians believe that the market price of a security reflects all known information about that security. If you’re not totally into charts and number crunching, technical analysis is not for you. This method of buying stocks is also largely based on short-term strategy, which means frequent trades, commissions and short-term capital gains taxes – assuming you make a profit.
Factors such as a company’s growth rate, balance sheet and quality of management are used to determine the true value of a security. Fundamental analysis can be described as the study and purchase of companies rather than stocks. Fundamental Investors aren’t concerned with price patterns on a chart, but with indicators of a company’s underlying financial strength.
Value and growth investing
Value investors fit within the wide spectrum of fundamental analysis. They look at how much a company is worth based on its assets, and how well the company uses its assets to grow its business. If the company’s stock price does not reflect the full value of its assets, the stock is considered undervalued and perhaps a good buying opportunity. Warren Buffet is a well-known value investor.
Growth investors look at how quickly companies have been able to grow their sales and earnings in the past, and how that growth is likely to continue in the future. When buying companies that are growing faster than other similar companies, growth investors hope to see their investment grow over the years.
Many long-term investors combine aspects of growth and value investing in their personal strategy, looking to identify undervalued stocks that have the potential to grow in the years ahead. By employing fundamental analysis, you can build a portfolio of stocks to hold for the long term, allowing the stocks to grow over the years
Find the right approach for you
Many investors find that a growth and value strategy works well for them. By using dollar-based investing (allowing you to buy fractional parts of shares with your predetermined investment amount) to purchase and hold stocks for the long term, you can build your portfolio through the years. Over time, you’ll develop your own set of criteria to pick stocks. Stick with the investing style that works best for you. Mixing up approaches may dilute the effectiveness of your chosen strategy.
© 2005 ShareBuilder Corporation. ShareBuilder is offered through ShareBuilder Securities Corporation, and a registered broker-dealer and member NASD/SIPC, and a subsidiary of ShareBuilder Corporation. ShareBuilder is not affiliated with Young Money. Call (800) 215-4679 with questions about ShareBuilder.