Basic Market Strategy

Posted by MoneyThinker in investing | 0 comments

Here on MoneyThinking we’ve been trying to help you get started with your own portfolio, and to learn some basics about the stock market. Today, we’re going to explore a little bit of basic marketing strategy: Some of the ways that people “play” the stock market.

One of the things that you need to know before figuring out what strategy you’re going to use is what your goals are for your investments.  Are you just trying to get a return to get your feet wet? Do you want to use your money to save for your child’s education or your retirement? Are you trying to get rich easy (which, I advise, is a really cruddy goal. Just saying)? If you’re hoping for savings for education or retirement, you’re going to want to use a strategy that minimizes risk as much as possible while maximizing profit; whereas if you’re just investing a small bit to learn the ropes, you can afford to risk a little bit more.

After you figure that out, you can start determining which strategy you are going to follow. There are three strategies that most people follow: Fundamental analyses, technical analyses, and buy-and-hold.

Fundamental analysis. Fundamental analysis is probably the most common strategy that people use when investing their money for the long-term. Fundamental analysis mainly focuses on the company that you are investing in. In short, fundamental analysis asks a certain set of questions about a company’s stock values and determines 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:

-          How healthy is the company currently?

-          Does the company have a strong future ahead of it, or is there potential for the company to struggle in the future?

-          (as a follow-up to the above question) How long do I plan on investing in the company? If the company will probably continue to do well over the next 10 years but has the potential to struggle after that, will I be ready to sell my stock prior to that or am I looking for something that’s even more long term?

-          How much has the company grown over the past 5 years?

-          How much cash flow is going in and out of the company?

-          Are there any current cases against the company or regarding the goods and services that company may be producing or offering that could affect the market in the future?

At this point, people who use fundamental analysis may use an Excel sheet to play with numbers. If you are going to use a fundamental analysis strategy, you better be ready to mess with a lot of numbers. 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 go 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? What if all of a sudden the company goes under because of a big scandal or something? Then not only have you lost money, you also may have lost all of the time that you put into working on those predictions.  Needless to say, this isn’t enough for people to not use it; honestly, it’s the most common practice of market strategy used today, and the most successful investors use it, and use it well.

Tomorrow, we’re going to talk about the other two strategies that people use: Technical analysis and buy-and-hold strategy. Stay tuned!