Technical or Fundamental?
This could be the most commonly asked question in the history of financial advisors. While I remain privy to technical studies there is no doubt that fundamentally investing has its place in a traders mind. Warren Buffett is the perfect example of a fundamental investor, buying big businesses at small prices and holding them until the stock certificates are yellow and faded.
Technical analysis involves the studying of price points and their affect on stock prices. Most technical analysts will agree that price is the most important factor to buying and selling a stock or security. Some stocks tend to fall when hitting $80 per share and explode out of the gates at $60 per share. Some trend in certain areas. Technical analysis is simply the study of when and why other investors buy at certain levels.
Fundamental investing encompasses the belief that stocks rise and fall with profits and general outlooks of the business. Fundamental investors look to invest in corporations with little debt, low PE ratios and a low stock price to value of the business. Fundamental investors are the first to buy when a company posts record earnings and generally the last to sell when reports turn sour. For this reason, I think that fundamental investing will bring an investor to react behind the overall market.
Both strategies are popular and profitable. Technical investing requires long periods of time looking at price levels and areas of demand whereas fundamental investing takes time in the books of your investments.
Institutions usually error on the side of technical trading, planning to enter into a position before another company does. Loaning institutions apply fundamental analysis to figure out the worthiness of a corporation before placing loans.
Fundamental analysis is best used for long term investments in businesses. Good growth and low PE ratios are the most basic parts to a fundamental study.
Technical analysis is best used on short term trading, where entry and exit prices is the difference in profitability or heavy losses.