A common dilemma facing anyone who invests in the stock market is whether to buy shares based on the company’s fundamentals or follow the momentum of the stock as indicated by technical analysis.
A fundamental investor studies companies in detail. It examines the prestige and experience of the promoters, the quality of management, the fate of the sector in which the company operates, the comparative position of the company with respect to other existing and planned companies in that sector -external environment-, mainly government policies regarding taxes, licences, pollution control, intervention affecting the supply of raw materials, etc. He also studies the company’s performance for at least the last three years and acceptable projections for the next two years.
If you’re happy with what you see, you put your money into shares of that company.
The “fundamental” investor is by nature a long-term investor, because they don’t look at what happens to the stock price in the coming months. He believes that stock prices will rise as the company does well in the coming years.
A “technical” investor is one who follows the movement of a company’s share price and makes his decisions based on his reading of the direction that share prices will take in the short term. He studies historical data on the movement of stock prices, extrapolates this information into the future, and makes his own forecast on stock movements. He decides the price levels that will trigger an upward or downward movement of the price of that particular stock. If he thinks the price will go up, he goes long on that stock, if he predicts a fall, he goes short.
The investor -technical- is not as concerned with the fundamentals of the company as the -fundamentalist-. He is impatient and is not willing to wait two or three years to see a reasonable return on his investment.
Now comes the question: should one invest based on the fundamentals or should one rely on the technical aspects?
If your intent is to get as much return as possible from your investments, but without taking unacceptable risks, then you need an investment strategy that takes into account both the fundamental strength of a business and the expected movement of the company’s stock. in the short term.
First, you’ll use fundamental analysis to create a list of companies that are doing well and are also likely to do well in the future. This list is your “investment universe”, you will consider investing only in these stocks.
Next, you will study the movement of the shares of these companies. Technical analysts use different methods to predict the movement of stocks in the near future. All of them are based on the past behavior of the stock over a long period, and this information is used to forecast how the stock will perform in the coming months.
From this study, you will make a list of companies whose shares you expect to go up soon and another list of companies whose shares you expect to go down.
Now, you make your investment decision. Naturally, you’ll buy shares of strong companies whose shares you expect to go up in the near term, and of (or go short) companies whose shares you expect to go down. He has managed to make profits before and at the same time has avoided junk stocks.
Why should we follow this strategy of fundamentals plus technical aspects?
If your investment is based solely on fundamental analysis, you will undoubtedly own shares of valuable companies. These are blue tokens that you can keep and pass on to your heirs. But there is no certainty that these shares will increase in value anytime soon. In fact, there are so many blue-chip stocks that they seem to stay price-fixed for months at a time.
When you restrict your investment to these companies, you are likely to have a portfolio of valuable companies. But when you also use technical analysis and invest in momentum stocks, you’ll make money sooner. You can also enter and exit stocks multiple times throughout the year, depending on what your technical analysis tells you about the stock’s performance. Once a stock has lost momentum in its upward movement, you exit that stock and invest in another on your “fundamental” list that is poised and poised to go higher.
That, dear investor, is the path to stock market wealth.
