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If you're just beginning to invest in the stock market, you're probably filled to the brim with questions. What is an ETF? How do you value stocks? What are the ways investors deal with market volatility? As great as those questions are, the biggest question that most newbie investors will have deals with how they should pick stocks.
Among Wall Street professionals, picking stocks using fundamental and technical analysis has remained the most traditional way to do this. That sounds pretty intimidating, doesn't it? Believe it or not, it's actually pretty simple once you get the hang of it.
It's totally normal to want to learn how real Wall Street traders would choose the stocks they buy. Here's how to pick stocks like a pro—literally!
Before we start talking about picking stocks using fundamental and technical analysis methods, let's discuss why this is so important.
If you really wanted to, you could do something easier. You could just trust a micro-investing app or a robo-advisor to make investments that do all the selections for you. That's fine. Many people succeed and get decent returns with this method.
However, if you want to have Ray Dalio-style returns, you will probably need to have more control over your investments.
The first thing you should do is take an online course on picking stocks using fundamental and technical analysis.
Don't worry, it's really not that bad. These two types of stock analyses are done using metrics that can be found in charts or readings. Each analysis has a different strength.
Fundamental analysis is used for long-term investors. It uses metrics like the P/E ratio, the P/E growth, and similar statistics. Each metric will tell you a little bit about the health of the company and will help clue you in on whether the company is doing well or not.
That's not all fundamental analysis shows, either. This strategy looks at management style, too. In many cases, technical analysis also gives you a good idea of where the company is headed.
Technical analysis, on the other hand, is favored by short-term traders and day traders. This takes the patterns of stock charts into account to figure out where the direction is headed. It's a bit more visual than fundamental analysis.
You should learn both, but if you have to pick just one online course, choose one that works with your trading style. Udemy has great courses on both.
If you have to stick to just one form of analysis, stick to fundamental analysis.
Fluctuations happen and patterns break. It's the way of the stock market. If you're looking to ensure that your investments will have a great chance at making it long-term and can't handle both technical and fundamental analysis, then sticking to fundamental analysis is the best option for you to try.
While it'd be ideal to be the guy picking stocks using fundamental and technical analysis strategies together, if you can only choose one, get fundamental about it.
Remember what each statistic is telling you about the company—and that not all company qualities can be quantified easily.
Every metric that you're seeing, from the finding out where the bar of resistance is, to figuring out what the P/E ratio is, will tell you a different snippet of the company's full story.
One of the biggest mistakes that people make when picking stocks using fundamental and technical analysis is forgetting what the numbers are saying. When you blindly make decisions based on numbers being good or bad, and don't look at what the numbers really suggest, you're uncovering a great way to lose money.
No matter which analysis method you choose, never get stuck on a single metric.
This is one of the most common mistakes people make when picking stocks using fundamental and technical analysis. Sure, some metrics are more important than others, but that doesn't make any single statistic the be-all, end-all of the stock market.
Business is naturally volatile. It's impossible to predict what a company will do with a single metric. To lower your risk as much as possible, it's important to take a holistic look at what the statistics are doing.
Use the strategy that works with your investment timeframe.
Picking stocks using fundamental and technical anaylsis techniques will only work if you know what kind of investment you want to make. Those who want to make a large investment that will pay off years later should look into fundamental investing.
If you're looking for very short term (think day trading) types of gains, then you may want to focus primarily on technical analysis. That being said, even relatively short term gains should keep an eye on business strategy and other fundamental specs when trading.
Growth investing and value investing are both different, and can be done by picking stocks using fundamental and technical investing.
If you're looking for long-term gains, you will need to look for different values of the statistics you want. Two of the most common forms of long-term investing strategies are value investing and growth investing.
Value Investing takes a look at established companies that are underpriced compared to their competitors. Dividends, slow growth, and steady (but below average) P/E ratios are what they look for. The idea behind value investing is that the price will rise.
Growth Investing zeroes in on the potential for growth that a company has. These investors look for very long term growth, with little interest in dividends—and at times, may even disregard a lack of earnings in some companies.
Don't forget to keep in mind industry averages when it comes to stats.
Statistics only mean something if they are compared to companies similar to them. In the stock market world, picking stocks using fundamental and technical analysis is only half of the battle. You can never really tell which stocks are outperforming the average without taking a look at what average scores
Every industry will have different standards about what is average, and much of it will deal with costs, potential profits, and industry regulations. For example, let's take the P/E ratios of a textile company, versus a tech company.
In an ideal world, the P/E ratio will stay low, since you don't want it to be overvalued when you buy it. Let's take a look at two hypothetical companies: Company A and Company B. Company A has a P/E ratio of 8, and Company B has a P/E ratio of 14.
If you were to just go by the rule of thumb, you'd say that Company A is the better investment. But, what if I told you that Company B was in banking, where the average P/E was 17, and that Company A was a textile company that had an industry average of 5?
Chances are, you'd realize that Company B was undervalued and would want to invest in it.
Finally, don't be afraid to use outside knowledge alongside your technical analyses.
Ever wonder why Warren Buffett reads six newspapers a day? It's because current events have a pretty big impact on the outcomes of stocks.
Though it's great to start picking stocks using fundamental and technical analysis, these forms of research are meant to be tools. They aren't supposed to be the only factors you take into account when selecting stocks.
If you notice that there are external factors that could help or harm a company, keep those in mind when picking your stocks! Let's take an example where this could play a major factor in stocks, shall we?
Let's take Company C. Company C is a company that makes aluminum products and distributes them everywhere. Recently, politicians in C's country have announced massive taxes on all metal products. This could impact Company C's stock for a very long time.