Investment is a process that requires the investor to make a detailed analysis of where he is putting his money and what the expected and desirable goals are. Knowing about the market and what prompts it to rise or fall are important. For an investment manager, there are two ways to doing market analysis – Fundamental Analysis and Technical Analysis. Some prefer to use only one of the two while others make use of both. There are also those who make use of none (be advised that this is the riskiest mode of investment management). Let us look at both ways of investment.
Fundamental Analysis: As the name suggests, fundamental analysis is done on statistics that lie behind the stock prices. Figures such as company’s growth rate, liquid assets, business etc. are taken into consideration for the calculation. These details help evaluate whether the company is expected to make profit in the times of come and whether their stock prices would increase or not. Another way to look at the same is to study whether it is safe to invest in the company under question. Good thing about this procedure is that it allows predicting if the stock prices are going to rise or fall in the times to come.
Technical Analysis: Technical Analysis does not go into extreme details as in the case of fundamental analysis. This is based on the general market trend and is determined by keeping a close watch on the way the average is moving. All results are formed by taking into account the past experiences of the company stocks with respect to the overall market. Do not interpret it to be just random talk. A lot goes into this type of management too and the outcome is accurate to a large extent. Past trends can be very helpful in predicting the future.
The next question is how one knows which of the abovementioned method of investment analysis to choose from. Before selecting any of the two, the investor has to know about market efficiency hypothesis. 3 types of market efficiency are under existence today:
Strong Form: Under this form, both the public and the private information have already been used to value the stocks. As a result, even those who work for the company and have access to all information cannot bring about a drastic change in the market.
Weak Form: Weak form is when the prices of the past are a mare reflection of current prices. As a result, it is very hard to determine the future on the basis of technical analysis. However, the method can be used to evaluate stocks which are either over or under valued. The best bet here is to use fundamental analysis.
Semi Strong Form: Public information is used to value the stock which is why neither of two modes can be used to reach the goals. The only way to make profits is to use information which is hidden from the eyes of the public and can be used to make future predictions.
As an investment manager, deciding which form of analysis to use would depend on none other than you yourself.
Long-Term Vs Short Term Stock Investment
People with short term goals would not be able to witness returns which otherwise can very easily be experienced. What I mean to say is stocks are for those who plan to invest money and leave it standing for long durations so that they can mature overtime.
Honestly speaking, both long and short term investment are full of risks and there is no way to ignore them. This can be proven by the fact that a clear warning is given to the investor at the time of buying a stock that there is no guarantee that the money would come back. If someone gain high returns today does not take away the probability that he might suffer from heavy losses tomorrow. However, as far as long term investments are concerned, there are very few portfolios that have gone wrong. On an average, the returns have been around 5% – 10% which can be fairly high depending upon the total amount of money invested.
Short term markets are very risky simply because of the high volatility that the market goes through. What may be going up this instance may fall the very next instance. The only people who can expect to gain with a short term plan are those who have large amounts to invest, can dedicate themselves to looking at the figures at all times and have the required expertise to predict the future graph. Unfortunately, there aren’t many amongst us who belong to this category and those who do are never available for advice. Even if they do give a piece of advice, it is highly generalized which cannot be banked upon.
The next question is – what is considered to be short term and what as long term? Short term investments range to a period of a year to 5 years. While long term investments can go up to 20 – 30 years. If you would be requiring the amount saved up within a period of next 5 years, it is best to stay away from the stock market. Similarly, elders should stay away from the stock market as post-retirement; they would require the money to meet their expenses. They may, however, invest in mutual funds or bonds that promise definite returns.
Market fluctuations can be pretty devastating (which could be seen during the recent recession) and cast dark clouds overall future plans. There are tons of opportunities to exploit and gain from but at the same time, there are many routes that only go towards losses. If you are aiming high, take the risk. On the other hand, if you are not willing to lose amounts, make a safe bet and invest in areas that are comparatively stable and low risk.
At the end of the day, it is you would have to make the choice and the onus of the results would also lie on your shoulders. Whether you want to come out laughing or in remorse is completely on the decision you make. As a final tip on investment, think before taking any step.