How to Choose Stocks | Fundamental vs Technical Analysis
By Jonathan Wagner
When trading stocks online, it’s important to make informed decisions about which stocks to buy and sell. It all starts with research. The two main schools of thought pertaining to stock analysis are the fundamental and technical approaches. Both methods require research, but each approach interprets data from a different angle. Furthermore, each approach prioritizes data differently. Not only are the priority and interpretation different, but there is also a different goal in mind. Both approaches seek to make a return on the purchase of stocks, but they do so within different time parameters.
Fundamental analysis emphasizes a company’s financial performance above all else.Fundamental analysis looks at all of the data related to the company’s operations, management, markets, and competition. As you can imagine, this process can be daunting for the casual online stock trader. In order to take a fundamental approach to trading, it’s usually best to purchase stocks for companies that you’re already familiar with. While this approach may present less risk, it can also be quite limiting.
When researching the most important data points, you will want to focus on price to earnings ratio.This ratio is simple to calculate. You simply take the price of the stock and divide it by the earnings per share over the past year. This ratio will tell you the amount that investors are willing to pay for $1 in earnings. The fundamental approach to investing is all about finding the bargain. Because of this fixation on bargain-buying,the fundamental approach to investing will often require a long-term goal and a tall order of patience.
The technical approach to investing is the most common approach, especially in the world of online trading. The technical approach seeks to analyze trends and data that are more readily available to the casual online trader. Instead of focusing on a difficult-to-research information specific to a company’s operations, you will focus on stock price, trading volume, and trends over time.
Quite simply stated, the technical approach is all about reading charts and observing patterns to make informed decisions. This information is easy to research thanks to the data that most online trading companies provide readily on their websites. For instance, in a recent Top 10 Best Trading article, we reviewed the research capabilities within TradeKing and Trade Station and found TradeKing to have the better research platform.
Your access to information concerning stock performance over an extended time frame should be a vital component in determining which online trading company to use. Many trading websites sort stocks into categories such as daily high performers, bargain and penny stocks, and more. This will make it easier for you to make informed decisions.
If you’d like to learn more about how to get started with online stock trading, check out this helpful article.
About Jonathan Wagner