2 Types of Investing in the Stock Market

Are you planning to invest in the stock market, but do not know where and how to start? Perhaps, you heard some statements like, “you need to be in front of your computer for the whole day to do such thing”, or “you need to make first a lot of money to invest”.

Some even say, investing is no more than gambling.

Well, it depends on what type of investor you are. In stocks, there are two kinds of investment. Each one has its own required values and commitment.

1. Technical Analysis

Ever heard the word “day traders”? Day traders are the ones using this type of analysis, which main focus is the charts, meaning stock price movements.

Every seconds, traders are either buying or selling the shares of different companies. And this process of buying and selling changes the overall price of a particular stock. They use charts – which are composed of “candlesticks” and where price movements can be seen – as a main factor in determining what shares to buy and what is not.

How do you earn profit from technical analysis?

They gain profit by buying a big number of shares at a certain price and selling it in a higher price. For example, you bought yesterday 20,000 shares of ABC Company with a share price of Php5. With the given example, your total holding is Php100,000.

After a day, you sold the same number of shares of ABC Company but with a higher share price of Php6. Now, your total holding is equal to Php120,000. Therefore, you gained a profit of Php20,000 (subject to commission and tax).

In technical analysis, what is your basis of choosing what stock to buy?

Patterns from the charts. Day traders base their actions by understanding the stock price movements through stock charts, which are comprised of “candlesticks”. Candlesticks are those bars with vertical thin line in the middle. It shows open, close, high, and low, of a particular stock at any given time.

A candlestick showing the open, close, high, and low, of a stock.

In addition, all day traders believe that understanding certain patterns or price movements are enough to identify which stock is going to perform well and not. Through patterns, they can identify what stock will move upward and what will move downward.

But, technical analysis, from its own word technical, requires a tremendous amount of study and knowledge. No wonder why statistics shows that 90 percent of traders lose 90 percent of their money in their first 90 days of trading.

2. Fundamental Analysis

Unlike technical analysis which main basis is the stock price movements, fundamental analysis requires thorough assessment on the company’s qualitative and quantitative characteristics.

An example of financial statements a) Statement of Cash Flows b) Balance Sheet and c) Income Statement

Fundamental analysis, or value investing, is finding a stock that are undervalued. Meaning, you buy the shares of the company at the price that is cheaper than its own true worth.

How do you earn profit from fundamental analysis?

You earn profit from fundamental analysis through:

  • Capital appreciation (or capital gains)
  • Dividends

With capital appreciation, for instance, you bought 5,000 shares of XYZ Company at a share price of Php15. With the given example, your total holding is equal to Php75,000 (5,000 shares x 15 share price).

You hold the stock for three years with, let us say, 34% return on investment. After three years, your total holding is equal to Php100,500 (75,000 x 34% = 25,500).

Capital gains basically means that your shareholdings are getting higher in value.

On the other hand, dividends are the company earnings given to its shareholders. Some companies provide dividends quarterly but most of the public-listed Philippine companies are in a yearly basis.

Dividends may give an idea that the company is doing good in business. Some companies provide dividends and some are not. Usually, blue-chip stocks like San Miguel Corporation, Ayala Corporation, and Jollibee Foods Corporation do an excellent job at providing dividends.

However, companies that do not provide dividends do not necessarily mean they are not earning.

Some securities, particularly the “new ones in the Philippine Stock Exchange” or those what we call “growth stocks” use their earnings as a form of reinvestment to their company, whether it is about acquiring new properties, building new branches, hiring more people, improving their system, the list goes on.

Every company has their own policy with regards to dividends.

In fundamental analysis, what is your basis of choosing what stock to buy?

A lot of factors, actually. But qualitative and quantitative factors play a large role in fundamental analysis.

  • Qualitative Analysis involves keen assessment about the company’s business model, competitive advantage, corporate governance, management, etc.
  • On the other hand, quantitative analysis comprises a thorough evaluation on the company’s financial statements.

To identify what stock will going to perform well, several financial ratios like earnings-per-share, price-to-earnings ratio, price-to-book ratio, sales-to-book ratio, etc. are being used. These formulas can be identified by the help of company’s financial statements, which involves balance sheet, statement of cash flows, and income statement.

Of course, we want to invest in a company that produces a continuous positive earnings over years. In contrast, downward numbers of net earnings may serve as a signal that the company is losing its share in the market.

Fundamental analysis involves buying and holding the company shares for several years, three as the least. Benjamin Graham, Warren Buffet, Ken Fisher, earned their fortune through value investing. It is not for the people aiming to accumulate wealth in a short-term basis. Rather, it is for the people who have patience to a) not be emotional about the movement of the market, and b) to hold the shares despite of the volatility.

Buy shares and hold them for years, even decades, even lifetime, is the philosophy of investors using fundamental analysis.

In conclusion, technical analysis involves stock price movement from charts while fundamental analysis comprises company’s quantitative and qualitative measurements. Choosing which one of them will vary on person’s values, belief, and preferences. There are people became successful using technical analysis. And also fundamental analysis.

There is no better than the other. But what is common to perform good to either one of them is the level of work you put in.

Do you want to become a trader or investor? What do you think you will more likely to be in?

Comment below!

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