When you begin learning on how to invest in the stock market, or any financial instrument for that matter, the main question you will have in mind is, how do I know or analyse the market in order for me to make the right decisions? I definitely had these questions in my mind before I got to read the Planet Wealth books. This is where analysis methods come into the picture. But before you even say, "Whoa, this sounds too much for me!", let me just try and explain that essentially, there will only be 2 basic methods you need to learn to analyse a stock, and they are using Fundamental Analysis and Technical Analysis.What is Fundamental Analysis
Fundamental Analysis is the method of analysing a particular stock or instrument based on current market conditions, market projections, and company performance data. Basically, fundamental analysis is using information that you hear in the news regarding a particular company, the industry that the company is in, the trends of that industry in terms of future growth potential and profitability, and also looking at the greater economic situation locally and globally. Based on the information that you have gathered, you can then determine that a particular stock has the potential to increase in value, or perhaps get into trouble and something that you would consider avoiding for now.
For example, company XYZ is in the gold mining industry, and there has been news that the gold prices are predicted to increase by 50% in the next year. Also, the company announced that it has record profits this year and it projects its profits to double in the next year. Based on these information, you can then say that fundamentally, this company is strong and have a great potential for its share prices to go up. Hence, you may decide to buy this stock or trade a bull put spread for this.
Generally, you would use Fundamental Analysis to get a long-term and short-term perspective or view of where you think the stock or share will go. However. this is more heavily used when deciding on entering a longer-term trade or investment/holding of a stock or share.
And Technical Analysis?
Technical Analysis is the method of using charts to analyse the performance of a share or stock. With technical analysis, you tend to draw lines on the charts to determine support and resistance levels of a stock as well as patterns and indicators. This may sound a mouthful, but basically, support is defined as the lowest price level (or bottom) that a stock generally tends to stay at a certain period of time. Resistance, on the other hand, is the highest price level (or top) that a stock or share generally tends to stay at a certain period in time. These 2 lines that you would draw on the chart would help you decide if you should go long or short on a stock, or in other words, if you're bearish or bullish the stock.There are many more details and information on how you can do technical analysis, and that's why the live trading room at Planet Wealth have been very helpful in terms of my learning and understanding of these concepts. Planet Wealth provides a lot of guidance in terms of getting you started with learning the different charting methods and indicators and how you can use them to analyse a stock.
Generally though, technical analysis is heavily used for short-term trading, though it is still used for long term trading to work out what the long term price patterns are. If you are trading for the shorter term, you need to look more on the technical side rather than the fundamental side, as in the short term, the price action would perform closely more on the technical side.
In summary, we use both fundamental and technical analysis for trading. The only difference is the amount or the weight that you put into each method of analysis into factor when doing your trades. For short-term trades, more technical than fundamental, and for longer-term trades, more fundamental than technical.
Another Planet Wealth System - Sharemarket secret unveiled!
Below is just a little information on this topic from my small unique book "The small stock trader":
ReplyDeleteThe most significant non-company-specific factor affecting stock price is the market sentiment, while the most significant company-specific factor is the earning power of the company. Perhaps it would be safe to say that technical analysis is more related to psychology/emotions, while fundamental analysis is more related to reason – that is why it is said that fundamental analysis tells you what to trade and technical analysis tells you when to trade. Thus, many stock traders use technical analysis as a timing tool for their entry and exit points. Technical analysis is more suitable for short-term trading and works best with large caps, for stock prices of large caps are more correlated with the general market, while small caps are more affected by company-specific news and speculation…:
Fundamental analysis
Perhaps small stock traders should not waste a lot of time on fundamental analysis; avoid overanalyzing the financial position, market position, and management of the focus companies. It is difficult to make wise trading decisions based only on fundamental analysis (company-specific news accounts for only about 25 percent of stock price fluctuations). There are only a few important figures and ratios to look at, such as:
• EPS/Revenue
• Cash/EBIT(TA)
• Margins
• Debt
• Management
• Products
• Shareholders
perhaps also:
• ROE
• P/E
• Dividend yield
Furthermore, single ratios and figures do not tell much, so it is wise to use a few ratios and figures in combination. You should look at their trends and also compare them with the company’s main competitors and the industry average. Preferably, you want to see trend improvements in these above-mentioned figures and ratios, or at least some stability when the times are tough.
Technical analysis
Despite all the exotic names found in technical analysis, simply put, it is the study of supply and demand for the stock, in order to predict and follow the trend. Many stock traders claim stock price just represents the current supply and demand for that stock and moves to the greater side of the forces of supply and demand.
If you focus on a few simple small caps, perhaps you should just use the basic principles of technical analysis, such as:
• Price and volume
• Support and resistance
• Trends and moving averages
I have no doubt that there are different ways to make money in the stock market. Some may succeed purely on the basis of technical analysis, some purely due to fundamental analysis, and others from a combination of these two like most of the great stock traders have done (Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, William O’Neil, and Steven Cohen). It is just a matter of finding out what best fits your personality.
I hope the above little information from my small unique book was a little helpful!
Mika (author of "The small stock trader")