Different Stock Picking Systems
There are 3 methods that you can use when you are stock picking. The first method is fundamental analysis, the second is technical analysis and the third is a combination of the two which I will call ‘techno-fundamental’ analysis.
The most common method of stock picking that is used is fundamental analysis. I believe that is because it is an easier concept to grasp. It is where you assess the ‘health’ of a company and then make an investment decision based upon the health relative to the price.
What are the things that you use to assess the ‘value’ or ‘health’ of a company? Well we look at things like revenue, profit, and future growth prospects of the company. There are many financial calculations that are available. You usually work out these values on a per share basis so that you are comparing like with like. It is important when you are share picking that the companies that you select are not only good but they are priced well.
There is a lot more to fundamental analysis and it is a great place to start. Then you have another type of analysis which is called technical analysis. Technical analysis is more about how the market is reacting to the fundamentals. You have to have a good understanding of indicators such as volume and be able to see patterns on the charts.
Technical analysis is a more advanced form of stock picking and not everyone agrees with its principals but there have been some very good traders who have used it. They believe that all the known information is already in the price and therefore you only need to track the price.
Why not combine the two types of analysis for your stock picking? ‘Techno-fundamental’ is a great way of getting the best out of both. Buy good quality stocks with a high intrinsic value but let the technical part of the analysis guide you into the market.
Filed under: Financial Advice