I’ve not done a lot of playing with the stock market, but I have done a bit of research and have a basic understanding of stock market strategy. Today we’re going to look at the most common marketing strategy, usually referred to as fundamental analysis. Fundamental analysis focuses on the company that you are investing in and requires you, as an investor, to ask a certain set of questions about a company’s stock values. You then use the answers to determine if the cost of purchasing the stock is worth the future investment in that stock.
Now, finding this out can be difficult. Some of the questions that an investor may ask when using this approach may include:
- What’s the company’s current financial situation?
- Does the company have a strong future ahead of it or are there “red flags” that may cause the company to falter?
- How long do I plan on investing in the company? If the company may struggle in 5 or 6 years (because of the “red flags” you find with the question above), is that an acceptable amount of time for you to invest, or are you looking for a longer-term investment?
- How much has the company grown over the past year? 5 years? Decade?
- What’s the cash flow look like?
- Is the company involved in a hearing or cases based on their goods and services? Could that be a threat to quality and/or reliability?
At this point, people who use fundamental analysis may use an Excel sheet to play with numbers. If I were to become more involved in the stock market, I would use fundamental analysis purely because it deals with a lot of numbers. I love numbers, and messing around with them, and I feel that quantitative data is more definitive and tangible. But, that’s just me! I really should have become a researcher. Anyway, at this point, people who swear by this strategy start. There are different formulas and estimates that people use (usually using the net value of the company, the average increase in stock, and all of that sort of thing) in order to predict how well their stocks will grow in the future.
Fundamental analysis is great to use for long-term investing, but at the same time, there is a bit of a risk. What if you’re wrong? I know that’s a really pessimistic way to look at it, but if you’re going for the long haul, you really do need to be careful. There have been bankruptcies and such that investors may not have seen if they weren’t paying attention. The most important part of any investment strategy is follow-up. Keep an eye on the companies that you invest in. In an economy like the one we live in now, anything’s possible, so make sure that you aren’t blindsided and be on top of your investments. Like I said, fundamental analysis is the most common investment strategy, so it has to be working for those who use it, right?
Have a great week, and we’ll see you here next week, on our new posting day, Tuesday!