There are many ways to analyse both a stock market and individual stocks within any given market. However, when it comes to which is the best, this seems to be something that no-one can agree on.
So how do you know which stock-picking strategy will suit you? Read on to find out more…
Fundamental analysis is not so much a science, but more of an abstract idea. The theory is that, whether for an entire market or for an individual stock, the investor can analyse the fundamentals of a company to determine its intrinsic value (what the market/company should really be worth).
At a market level, factors include economic growth rates, interest rates, unemployment figures and political situations.
For individual stocks, much of this analysis will be performed over the company’s accounts, on the basis that a company is worth the sum of its discounted cash flows.
Whilst the idea works perfectly in theory, the difficulty is that, in both markets and individual companies, all of this information is subjective and future performance relies on a plethora of immeasurable factors that constantly change over time.
Whereas fundamental analysis tends to rely on the financials coming out of a company, “qualitative analysis” takes this into account, but places a much higher importance on the things that are just recorded in numbers: management.
When you think of all the big successful companies, more often than not they’ll be a big successful person behind it. Think Apple and Steve Jobs. Think Amazon and Jeff Bezos. Think Tesla and Elon Musk.
In qualitative analysis, it’s vital that the investor asks themselves: who, what, where, when and why, all in relation to the upper echelons of management.
Finally, this technique then ties this analysis of management in with other factors that can be quantified: public opinion, brand name, etc.
Value, Growth and GARP Investing
Value and Growth investing are two contrasting strategies, and the GARP strategy (Growth At A Reasonable Price) is a merry middle ground of the two.
Value investors tend to look for companies which have an excellent track record of proven results. Indicators include consistent profit and cash flows, and a dividend payment which grows year on year.
On the other hand, Growth investors are looking for higher risk, higher reward stocks. They find these by looking at metrics such as revenue growth and typically consider stocks with higher PE ratios than value investors.
GARP is then trying to find the middle ground by seeking out stocks which have good top level growth in revenue and profits, but which do not have high price multiples.
Which Should I Choose?
The most suitable approach to analysis will vary from investor to investor. To find out more about each method of analysis, check out Banc de Binary for market and stock analysis, as well as the latest financial news which you’ll need to factor into your analysis.