Stock trading or investment in stock, has attracted lot of attention from prospective investors looking for maximizing returns on their investment. However, upon close analysis and scrutiny reports have always indicated that only 25% of stocks, being traded on stock exchanges, result in profitable investment. Therefore, it is essential that a well-established and tested strategy be adopted to successfully avert the risks that are inherent in stock market investment. With globalization of business, entire economy has experienced great expansion as well as merging and lending credibility to Thomas Friedman’s concept of The World is Flat. Many large business corporations have entered global markets by setting up branches worldwide, therefore, stock prices have become vulnerable to external factors which are not concentrated within the nation or continent. It has become more difficult than ever to accurately predict stock price movements given the extensive external factors that currently impact various organizations, sectors, and finally the prices of their stocks. Global commercial and trade factors, as well as geopolitical tensions have begun to impact stock prices, increasing the requirement to be extremely judicious as well as, prudent, when picking stocks. By performing extensive analysis and research about the stock, the sector, as well as all external factors which may impact the stock price, one can ensure, that the risk to exposure due to volatility and unpredictability in stock prices is minimized. Strategizing stock market entry, as well as stock investment activity, can go a long way in making investment in the stock market a pleasurable experience, with it becoming our preferred investment option forever. Let us check out some time tested strategies applied for picking stocks to benefit from both the highs of this roller coaster ride, as well as, the lows.
The one major strategy for investing in the stock market is fundamental analysis of the stock, as well as the sector. This stock investment strategy is the foundation for every other strategy which one may employ as this cannot be disregarded, whatever the type of investment, stock or sector selected. Any other strategy has fundamental analysis of both quantitative and qualitative factors of an organization, which essentially includes the thorough evaluation of a stock from every angle through expert scrutiny of all past and current financial statements along with future forecast of profitability, as well as growth, as its core factor. It is very important to acquire knowledge of analysis and comprehension of financial statements of a company to understand the intrinsic value of its stock. All analytics of a company’s fundamentals are aimed at arriving at the real worth of a stock, which is the value of returns an investment in the stock can provide, to the stock investor over a period of time. All stock purchase and stock sale decisions are based on whether the stock is undervalued, in comparison to its intrinsic value, or is overvalued, on the stock exchange. When a stock is undervalued, it is considered the right time to invest in the stock as the market price is bound to catch up with the true value of the stock, sooner or later. This valuation is based on the calculation of a company’s worth on the basis of discounted cash flows, which is simply, all the future profits of a company summed up, with factoring in of loss of value of money with time. The logic behind valuation of a stock on the basis of future profits the company can generate is that this ability can convert into cash flow for investors in the long term. The basis in simple language is what every business all over the world is based on namely, profitability. Intrinsic value represents simply all revenue after deduction of all related expenses, the company is expected to generate over a period of time, in the future.
The intrinsic value of a stock which is higher than the present market capitalization, is an indicator of the stock being a good buy capable of generating excellent returns. The discounted cash flow theory is based on consideration of certain factors which compose the intrinsic value. Some of these factors for discounted cash flow of five years in the future, can be listed as:  growth rate representing the rate at which earnings are expected to grow in the next five years, cash flow which represents the profit available for distribution among shareholders, assuming all profits are to be distributed and not utilized elsewhere. Discount factor which implements the time value of money into the present value of the cash flow. The present value of the firm depicted by the intrinsic value of the business in five years. The capitalization rate which accounts for the discount rate for a constantly growing value of capitalization denoting market cap of the company in future years. All these factors are given due consideration, for calculation of present intrinsic value of a stock, and calculations are based on each value being calculated for every year from the present, up to five years from now.
The discounted cash flow theory has been the basis for major acquisitions, partnerships and collaborations of businesses worldwide. This is due to the assumption that a business is inherently worth the future value it can generate in the form of profits, as stocks are a part of an ownership in a company they can also be valued on this basis. However, what is confusing for a novice to stock investment, is that if stocks have an intrinsic value which can be calculated, why then do stocks exhibit such volatility in their valuation on stock markets, where stock prices can change in minutes. Also, why do people buy stocks at prices higher than this value, or sell at lower than the intrinsic value of the stock. This is where technical analysis enters the picture being the explanation for these stock price dynamics. The reason behind this difference in market price of stocks from its intrinsic value is that stock traders temporary stock trends, thereby creating highly dynamic demand supply equations within the stock market, which is largely controlled by trader sentiment, disregarding all fundamentals and placing their entire trust in stock price trends. These traders feel that investors who invest on the basis of fundamental analysis only are being extremely negligent by not factoring in stock trends, which control stock prices based on each stocks demand-supply situation in the stock market. Traders believe that stock prices do not represent the value of a company, the only factor to be considered is whether the stock is capable of being sold at a price higher than what you bought it for. This has been a longstanding debate among investors favoring absolutely different styles and approaches to investing in the stock market with many critics labelling the fundamental analysis strategy, as the greater fool theory.
Based on this strategy the two types of investors can be identified as the technical investor and the fundamental investor. The technical investor is the one who is unconcerned with the financials and the intrinsic value of the stock, preferring to depend on technical analysis charts, signifying the stock price trends on the stock market and indicating future stock movements. These technical investors identify such stock trends and ride them both ways, whether upswing or downswing, to make profits. Fundamental investor of stocks arrives at calculation of intrinsic value of a stock through intense scrutiny of all financial, as well as qualitative and quantitative, factors impacting the future profits of a company. Both types of investors are equally correct in the assumptions and bases for making stock investment choices, as no approach can be termed as inappropriate or faulty. Rather it should be viewed as each type of investor is intelligent in utilizing the strategy which is most applicable for the type of investment and returns which are aligned to their investment goals. Fundamental analysis is a more long term investment strategy whereas, technical analysis is best suited for short term traders involved in day trading or swing trading.
Most stock trading strategies depend upon fundamental analysis in some form or the other. Most strategies are complicated, difficult to comprehend, put into practice and master, which is essential, if one wants to become an investment expert, utilizing fundamental analysis for optimizing stock selection and ensuring excellent stock investment returns. Even the simplest stock analysis requires extensive financial and accounting knowledge, as well as awareness of external economic environment, along with dynamics existing therein, which impact every business. Given that stock market investments are subject to extreme risk due to inherent volatility and fluctuation in stock prices, it is a wise decision to take the help of experts of fundamental analysis to provide guidance in stock selection, so as to avoid incurring unsustainable losses through investment in stock. Our expert fundamental analysis are masters of the strategy having vast exposure and experience, making them proficient at fundamental, as well as technical analysis through all latest technological tools at their disposal. Get in touch with our master strategists who are experts in fundamental and technical analyses.