Fundamental analysis and Technical analysis are two common methodologies used when analyzing any given investment. This article explains Fundamental Analysis vs. Technical Analysis investment methodologies to help you better understand how and when each is used.
Fundamental analysis is the approach whereby one tries to calculate the intrinsic value of a given stock by looking at the basic economic factors, the fundamentals which would impact its value. Some of the factors that will be looked at include:
- Growth prospects for the company.
- The competitive factors the company faces.
- Revenues, expenses and income.
- Expected return on equity or assets in the industry.
The main goal of this analysis is to establish a value for the stock that would factor in all of these underlying factors. This is considered as a long-term investment approach as it doesn’t look at the short-term pricing and trading swings. This methodology is considered to build a valuation based on backward and forward-looking information.
This is an investment methodology that evaluates investments purely on the market activity surrounding them, and doesn’t look into the actual operations or value of the company itself. Some of the factors that are looked at include:
- Trading volumes over time.
- Historical Pricing of the shares.
- Industry trading trends.
This methodology tends to capitalize on pricing opportunities and trends that can be identified in the market activity around each share. Since this methodology is purely based on historical market activity, it is considered a backward looking methodology. Join our Newsletter List
Fundamental Analysis vs. Technical Analysis
Key Factors to be considered when choosing a methodology between the two:
- Time horizon – Fundamental analysis is a long-term investment strategy whereas technical analysis is considered far more of a short-term methodology. By pricing on intrinsic values fundamental analysis is working towards the long-term value of a company whereas by trading on market trends technical analysis is considered to be short-term focused.
- Investment Approach – Are you an investor or a trader? Fundamental analysis is investing in companies and relying on their underlying value to drive your return while Technical Analysis is like a trading strategy where you are aiming to drive returns out of identified trends and opportunities.
Though major funds invest millions of dollars in sophisticated technical analysis trading software, the average investor will likely be far better served if he/she just focuses on fundamental analysis investment strategy.
Investing in foreign stocks means holding shares of companies that are not only based in different geographical locations but also driven by the respective economy-specific factors. Investing in foreign stocks helps to spread the investment risk among the international markets that are different from the home economies.
People who choose to invest in international markets look to gain from the diversification and growth in other economies. This is an important factor since no particular market has consistently remained on the top, and there are a wide range of high-performance markets all over the world.
But note that, just like most other things, International investing has its flip side. When measured in terms of Volatility, foreign stocks are considered to be more risky. Besides, the risk of dramatic changes in their market value, international stocks also have other risks associated with them e.g. Currency Risk which stems from potential unfavorable movements against the home currency. But at times currency movement can also work in favor of the investor and help in enhancing his/her returns. Political Risk that arises from an unstable government or military action in the country of investment. We also have a Inadequate Regulation Risk in the global markets as compared to developed markets like those in the United States. This increases the risk of manipulation or fraud. Another Risk is Insufficient Information available about various international markets, which can limit the investor’s precision of market movements. You can have difficulties interpreting the international market’s information as an outsider investor in addition you need to take note of the fees involved like the commissions and Taxes.
The are various Routes that one can trade foreign stocks as discussed below:
- Direct Investing – There are two ways by which investors can invest directly in foreign stocks. The first way is by opening a global account with a broker in their home country, providing the ability to buy foreign stocks like E*TRADE, Charles Schwab, Fidelity etc. in the United States. The second way is to open an account with a local broker in the target country that offers services to international investors like OCBC Securities in Singapore , Boom’s Trading Platform in the Hong Kong. These two trading Platforms gives access not only to local market but other stock markets. Investors should make sure that these brokers are registered with the market regulator in the home country. In order for investors to pick the right trading platform based on their investing style and interest, they need consider other factors like fees, costs, and facilities provided by the brokerage firm. It is not advisable for small investors to go direct as the system is complicated involving so many things like currency conversions, costs, taxation issues, technical support, research etc. Only serious and established investors should indulge in this process.
- American Depository Receipt (ADR) – ADRs work well for investors as well as for non-US companies. ADRs offer investors a convenient way to hold foreign stocks and also provide an opportunity to non-US companies to establish an US presence and even raise capital in the US stock Markets. Example is one of Alibaba Group Holding Limited World’s largest IPO. The ADRs can be either sponsored or not and have 3 different levels depending upon foreign companies’ access to US markets, as well as disclosure and compliance requirements. Level 1 ADRs cannot be used to raise capital and are only traded over the counter while level 2 and level 3 ADRs are both listed on an established stock exchange e.g. NYSE, NASDAQ only Level 3 ADRs can be used to raise capital.
- Global Depository Receipts (GDRs) – With GDRs a depository bank issues shares of foreign companies in international markets typically in Europe and are available to investors within the US giving them an opportunity to invest in foreign stocks. Though they GDRs are dominated in US dollars and at times in Euros or Sterling Pound, they are typically traded, cleared, and settled in the same way as domestic stocks. London and Luxembourg stock exchanges are the most common destination for listing of GDRs other exchanges include those in Singapore, Frankfurt and Dubai.
- Mutual Funds – These funds are like regular mutual funds in terms of the benefits they offer and how they work. except they hold a portfolio of foreign stocks rather than domestic stocks. These funds come in a variety of flavors with something for everyone from aggressive to conservative investors. The main types of funds that invest in foreign funds are Global Funds, International Funds, Region or country specific funds and international Index Funds. But note that just like many other international investments, these funds tend to be costlier than domestic counterparts.
- Exchange-Traded Funds (ETFs) – Picking the right ETFs is easier for investors than constructing a portfolio of stocks by themselves. While a single ETF can offer a way to invest globally, there are ETFs that offer more concentrated picks e.g. on a particular country. There are a wide range of international ETFs within different categories like Geographical Region, Market capitalization, Investment style, sectors etc. Some of the ETFs come from Providers like Schwab, Flexshares, iShares, SPDR, Vanguard etc. Investors should research the costs involved, liquidity, fees, trading volume, taxation and portfolio before buying any international ETFs. Find Investing Books
- Multinational Corporations – If you are not comfortable investing in international stock using the above methods, then you can look for domestic companies that have a majority of their sales and revenue overseas. For an US investor Coca-cola company(KO) or the McDonald’s Corporation (MCD) provide a good example.
There are many routes to choose from if you want to invest in foreign stocks but it is paramount that the investor first learn about the product they are investing in before they make an informed decision which one he/she can pick besides having knowledge about the political and economic conditions in the country of investment which is essential to understanding the factors that could affect the investment returns. Investors should put focus on their investment objectives, costs and prospective returns, balancing it with their risk tolerance when they are making a choice on international foreign stocks. Join our Newsletter List.
Pinterest is one of the social media platforms that you can use to engage and drive traffic to your blog. In fact if you use Pinterest in the best way, it can be the biggest source of traffic to your blog. In this post we are going to look at some of the things that you need to work on in order to fully benefit from Pinterest.
USE AN ENHANCED PROFILE
You can enhance your profile by doing the following:
- Change your profile to a business page.
- Verify your website URL.
- Add keywords beside your name like if you are an event planner, add ” Event Planner” on it.
- Include links to social networks.
- Create a custom URL.
- Since you have a business page, it does not make sense to put your profile picture there, it will be better if you use a profile photo relevant to your industry.
- Incorporate Keywords in your bio.
- Add your location to boost local traffic.
- Then remember to Turn off your ” Search Privacy” settings.
- Write a valuable and engaging description.
- Include keywords e.g. #hashtags, mention people and add your URL in your description.
- Add the correct source URL. Add your URL if you own the content.
- Use large, tall and eye-catching images.
- Do Not use URL shortening such as bit.ly, goo.gl etc. since these are blocked.
- Use search-friendly filename for images and add keywords in it.
- Use rich pins to add more details to your content and make it more informative.
- Pin regularly and consistently.
- Use auto-schedule tools to keep your pinterest fresh.
- Add the ”Pin It” button to your browser to easily pin content from other sites.
- Add more pins that your targeted audience will love.
- Get influencers to pin your content.
- Find out what your competitors are pinning and their most popular pins.
- Test with Pinterest Analytics which content gets most pinning and add similar pins.
- Create content related to current trends or events.
- Share pins related to current trends or events.
- Avoid self promotion. Pin preferred images without human faces.
- Pin older content again to other relevant boards.
- Pin other type of content such as Videos or animated gifs.
OPTIMIZE YOUR BOARDS
- Create specific board Title
- Write clear description and inject some keywords.
- Use enticing cover photos to grab people’s attention.
- Add enough pins in each board to make them look complete.
- Create ” Top Pins” boards. It’s a way of convincing your visitors to pin them again.
- Put your best boards to the top row.
USE PINTEREST WIDGET
- Use the ”Pin it” button to your blog. Add to your site URL in your images ALT tags.
- Add a share button to your site.
- Embed a board widget to your site’s sidebar or footer.
- Embed a related pin within your blog post. Infolinks-best Google Adsense Alternative
- To engage your audience, you need to Reply to comments, or like pins of people who pin your content.
- Invite contributors to pin on your board or join boards.
- Connect your social media accounts to pinterest.
- Follow people in your industry or Niche.
- Run a contest directly on your site. Join Affiliate Programs.
In this article we look at the four keys that we believe every stock investment should have. These are not new things but rather the core principles that successful investors have been following for decades.
- Invest in sectors and industries that you understand – Becoming an expert in certain areas of the market will give you an upper hand when it comes to selecting stocks to buy. This is like a foundation for all other steps that follows. Pick a given sector or industry and try to get information on it as much as possible. This will enable you to make informed decision when it comes to buying stock.
- Find companies with a Long-Term Competitive Advantages – Companies with long-term competitive advantage have an ”economic moat” i.e. Economic protection. These companies have the following advantages:
- A recognized brand.
- The ability to produce products cheaper than anyone else.
- The ability to sell their products cheaper than anyone else.
- Barriers to entry that make it difficult for competitors or new companies to compete.
- The opportunity to grow at a cheaper cost than anyone else.
- A duopoly situation where two companies dominate the industry like Airbus or Boeing.
- Networking effect where the users of the product or service makes the business more valuable like Google.
3. Look for companies with Excellent Management – This can be done by reading annual and quarterly reports and studying the history of the company’s current management in an attempt to understand what the management is currently doing and what they may do in the future. You can look at the following:
- The management’s history of decision-making. Do they have a track record of someone who we would actually hire if given a choice?
- Understanding how management is compensated. Is their compensation based upon the success of the firm?
- Ensuring that management is shareholder friendly. Do they do things that have the best interest of shareholders in mind?
These questions will help you to answer the question as to whether or not we trust the management enough to purchase the stock.
4. Buy When the stock is at a Good Price. Discounted to Intrinsic Value —Find stocks that are currently trading below the market price. If you can be able to find stocks that are trading below their intrinsic value and have the other three core principles then we would have the formula for a sound stock investment. If you find a stock with the first 3 principles but is not trading below the market price, then it is better you wait. Any investor should know that the price at which he/she pays at, is a critical piece of investing. If you get it wrong then the investment will have a hard time making money.
When all the four principles align then the possibilities of making money increase, though this does not guarantee that you will make money but rather increases the probability of making money. Join our Newsletter List.
We have sector & company specific risks in investing. Here we look at some universal risks that every stock faces irrespective of its business.
- Rating Risk – This occurs whenever a business is given a number to either achieve or maintain. Every business has a very important number as far as its credit rating is concerned. The credit rating directly affects the price a business will pay for financing. For public traded companies they have analysts rating which is even more significant value than the credit rating. Any changes to the analysts rating on a stock seem to have much bigger psychological impact on the market. The shifts in ratings, whether negative or positive often cause swings far larger than justified by the events that led the analysts to adjust the ratings.
- Commodity Price Risk – This is simply the risk of a swing in commodity prices affecting the business. Companies that sell commodities benefit when prices go up, but suffer when they drop. Companies that use commodities as inputs will get affected when we have swings in prices, in addition this may affect the whole economy especially when commodity prices go up as people restrain from spending.
- Headline Risk – This is the risk associated with stories in the media that will hurt a company’s business. One bit of bad news can lead to a market backlash against a specific company or an entire sector.
- Obsolescence Risk – This is a risk that a company’s business may become obsolete. The biggest obsolescence risk is that another person may find a way to make a similar product at a cheaper price.
- Detection Risk – This is the risk associated with the auditor, Regulator or any other authority that checks your business compliance to the set requirements or standards. If the companies earnings or any other financial malpractices are happening, the market reckoning will come when the news surfaces. With the detection risk, the damage to the company’s reputation may be difficulty to repair and in some cases, the company may never recover.
- Legislative Risk – This risk refers to the tentative relationship between government and business. Specifically it is the risk that government actions will constrain a corporation or industry, thereby adversely affecting an investor’s holdings in that company or industry. This risk can be realized in several ways: new regulations or standards, specific taxes etc.
- Model Risk – This is the risk that the assumptions underlying economic and business models within the economy are wrong. The mortgage crisis or 2008-2009 is a perfect example of what happens when models don’t give a true representation, in this case risk exposure model doesn’t give a true representation of what they are supposed to be measuring.
- Inflation Risk and Interest Rate Risk – Interest rate risk, refers to the problems that a rising interest rate causes to businesses that need financing. As their costs go up due to interest rates, it is harder for them to stay in business. If this rise in rates is occurring in a time of inflation, and usually rising rates are used to fight inflation then a company could potentially see its financing costs climb as the value of the dollars its bringing in decreases. A rise in interest rates and inflation combined with a weak consumer can lead to a weaker economy.
Every investor should know that there isn’t a risk-free stock or business. The rewards of investing can still outweigh the risks that every stock faces be it universal risks or risks specific to the business. The best thing to do as an investor is to know the risks before you buy in. Join our Newsletter List.