Choosing an investment can be a daunting task with so many options available. However, with the help of some precise and innovative strategies, I will try and help you pick out an investment that best suits your needs.
What type of investor are you?
- Are you a small investor, e.g. investing £500-£5,000? Or are you a more severe investor with £10,000-£50,000 to invest?
- Do you plan on holding onto this stock for one year or five years?
There are thousands of different types of stocks, but each one is different in its way; it’s essential to research a stock before you invest your hard-earned cash.
There are several strategies to help choose the right stocks for you, but two of the most popular ones are technical analysis and fundamental analysis. Technical analysis is based on studying price trends, historical price patterns and statistics.
In contrast, fundamental analysis involves looking at an underlying company’s balance sheet and income statement, which indicate whether they will have beneficial results in the future. I shall elaborate further by going through both techniques step-by-step:
Identify a stock with potential.
Investing in a company that pays dividends is very important – this is where buying shares in well known ‘blue chip’ companies comes into play as these companies usually pay steady dividends every year (e.g. HSBC, Vodafone Group etc.)
First of all, let’s identify the stock market sectors which are performing well over the past few months; these indicators are found on free financial websites such as money.co.uk, so save yourself some money! The two main sectors currently performing well are medical and media companies (newspapers, TV networks etc.).
These have been doing well for several years now, but there is still space to grow further, so it would be safe to say that investing in these stocks could prove fruitful in the long run.
Fundamental Analysis information
The next step involves using fundamental analysis, which looks at financial information about a company to predict its value. One way of doing this is to look at revenue, debt levels and results from past years to try and predict how successful future years are likely to be. It is always important not only to look at one year but multiple years because profits can fluctuate up or down significantly over time, however over the long run, a company tends to be more successful.
It involves using charts, graphs and financial ratios to try and predict future stock prices based on the current market. It is not advised to use this method for short term (less than one year) periods because you cannot be sure whether or not the price of a stock will move up or down in that period which would make it hard for you to know where your money should be invested.
The most popular method of doing technical analysis is by looking at patterns rather than individual stock predictions. Several patterns have been developed over time, such as ‘Double Top’ and ‘Head and Shoulders’.
Fundamental analysis focuses more on predicting a company’s actual value at any point in time rather than just predicting whether or not prices will increase or decrease. So, for this reason, it is often considered a better way to predict stock prices, although it still has its faults.
Technical and fundamental analysis are better ways of predicting stock prices than just following what other people say when it comes to a company’s value. Both techniques take into account different factors, which then become helpful for investors to get a better understanding of the direction that a stock is going rather than just relying on opinions.
Using these two techniques together provides better forecasts for future prices over any other prediction method. Due to their simplicity, they’re easier to do, meaning that more people will buy shares with confidence if they know how much they should be worth.