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Technical Analysis Or Fundamental Analysis When Investing in Stocks?

When investing in stocks, investors are often stuck between following the market's momentum as indicated by technical analysis and buying shares based on the fundamentals of the business.

For fundamental investors, the details of a company are crucial. As well as assessing the quality of management, assesses the influence and expertise of the promoters

A company's fortunes in its sector of operation, its comparative position in relation to other companies in that sector, its external environment, mainly government policies relating to taxation, and the recent performance of competitor companies. Then there are licensing issues, pollution controls, raw material supply disruptions, etc. Additionally, he analyzes the performance of the company for at least the past three years, along with projections for the coming months.

Invests In Shares Of That Company

By nature, the "fundamental" investor is a long-term investor, since he doesn't pay attention to what will happen in the stock market next month. The company will do well over the next few years, so he believes the share price will rise.

An investor who is a "technical" observes the price movement of shares of a company, and makes decisions based on his perception of how the shares will move in the near future. His analysis of historical data about the price movement of the shares into the future allows him to predict what will happen to those shares in the future.

An investor decides whether a rise or a fall in the price of a particular stock will be triggered by certain price levels. The investor goes long if he believes the stock's price will rise, short if he believes its price will fall. In contrast to fundamentalists, a technical investor does not care as much about a company's fundamentals. His investment will not accrue a reasonable return after two or three years, and he is impatient.

Invest On The Basis Of Fundamentals Or By Going By Technical Analysis?

Your investment strategy should consider both the fundamental soundness of the business as well as the estimate of how the company's shares will move over the next year or two if your aim is to gain as much profit as possible from your investments.

In order to find companies that are doing well and are also likely to do well in the future, you will perform fundamental analysis first. You will consider only investing in shares from this list as part of your "investment universe".

You will then examine the movement of these shares. Different methods are used by technical analysts to project the movement of shares in the near future. They are all based on the historical behavior of the shares over a long period of time and are used to forecast how the shares will perform over the next few months.

As a result of this exercise, you will find out what companies you anticipate going up in the near future, and what companies you anticipate going down in the near future.

The decision to invest is now up to you. By necessity, you will buy shares of solid companies whose share price you expect to increase in the near term, and you will sell them, or short the shares, of companies whose shares you expect to decline. You have been able to make profits earlier and avoid junk stocks as well.

Fundamentals Plus Technology - How Does It Work?

Only investing based on fundamental analysis will likely result in you owning shares of valuable companies. You can hold on to these blue chips, and leave them to your heirs. These shares may reach higher prices in the future, but this is not certain. Many blue chip stocks actually just stay the same price for months on end.

Your portfolio will be more valuable if you focus your investment on these companies. Investing in momentum stocks and combining technical analysis will also help you make money sooner. According to the predictions of your technical analysis, you may also move into and out of stocks several times over the course of a year. In the event that a stock loses momentum in its upward movement, you sell the stock and invest in another one on your "fundamentals" list that is poised and ready to grow.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes

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