The selection of stocks for investment purposes requires conducting analysis in order to determine the most profitable stocks. There are two most common schools of thought that are utilized in conducting analysis for investment purposes are fundamental analysis and technical analysis. While some investors utilize fundamental analysis, others prefer to utilize...
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The selection of stocks for investment purposes requires conducting analysis in order to determine the most profitable stocks. There are two most common schools of thought that are utilized in conducting analysis for investment purposes are fundamental analysis and technical analysis. While some investors utilize fundamental analysis, others prefer to utilize technical analysis and others conduct both fundamental analysis and technical analysis. For instance, Warren Buffet conducts fundamental analysis whereas George Soros utilizes technical analysis for investment decisions (Chauhan, 2013). Each of these renowned investors are successful in their investments through the use of the different analysis. The use of the different methods for selecting stocks for investment purposes is attributable to the unique attributes associated with each of these analysis procedures.
Fundamental analysis is a stock valuation technique that utilizes economic and financial evaluation to forecast the movement of stock prices (Badami, n.d.). When conducting fundamental analysis, the investor considers various factors including a company’s financial reports as well as non-financial information. Some of the non-financial information that is taken into consideration include approximates of the growth of demand for a company’s products, changes in government regulations, changes in the economy, and company or industry comparisons. Chauhan (2013) state that fundamental analysts believe that the most suitable indicators of the intrinsic or fair value of a stock.
On the contrary, technical analysis is a valuation method that involves predicting the future financial price movements of a stock based on the past price movements (StockCharts, n.d.). While it does not generate absolute forecasts regarding the future, technical analysis provides suitable information for investment purposes. In this regard, technical analysis helps investors to expect what is more likely to occur to stock prices over time. When making assumptions regarding the future stock price, investors consider the fundamentals of the underlying company. The three basic assumptions of technical analysis include the stock market considers everything while fixing the price, history repeats itself, and movement of stock prices is governed by principles of demand and supply (Chauhan, 2013).
The most suitable approach for selecting stocks for investment purposes is a combination of fundamental analysis and technical analysis. A combination of this strategy is the most appropriate approach since these valuation methods provide different information to guide investment decisions. Even though these techniques are considered as opposing approaches to evaluating securities, they have been utilized by many successful investors in selecting stocks for investment purposes. Therefore, a combination of fundamental analysis and technical analysis improves the decision-making abilities of investors and contributes to success.
The other reason for using both fundamental and technical analysis is that the combination enables investors to consider two different aspects of a stock before selecting it for investment purposes. Fundamental analysis enables an investor to select the right stocks for investment while technical analysis helps in determine the most suitable time for investing in the selected stocks (Chauhan, 2013). For example, an investor can utilize fundamental analysis to identify undervalued stock and conduct technical analysis to determine the specific entry and exit points for the position (Kuepper, n.d.). Therefore, the idea of using both approaches is the most suitable since it enables the investor to examine the different aspects of a stock before making investment decisions. The ability to look at the various aspects of a stock prior to making investment decisions cannot be achieved when using either of these two approaches. In my opinion, I believe that combining fundamental and technical analysis is the best approach.
References
Badami, K. (n.d.). The Basics of Fundamental Analysis. Retrieved November 23, 2017, from http://www.indiahowto.com/basics-fundamental-analysis.html
Chauhan, V.S. (2013, July 11). The Most Effective Approach to Stock Investing! Retrieved November 23, 2017, from https://amigobulls.com/articles/the-most-effective-approach-to-stock-investing
Kuepper, J. (n.d.). Technical Analysis: Fundamental vs. Technical Analysis. Retrieved November 23, 2017, from https://www.investopedia.com/university/technical/techanalysis2.asp
StockCharts. (n.d.). Technical Analysis. Retrieved November 23, 2017, from http://stockcharts.com/school/doku.php?id=chart_school:overview:technical_analysis
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