Investing In The Stock Market

How can average-earning workers make their money work for them? This is the one question that employees should start asking themselves given the unstable economy.

Nowadays, most employees, in one way or another, are not contented with their jobs and the corresponding salaries. The possibility of getting reduced retirement packages has also worsened the situation. In most cases, there are no more golden parachutes waiting for retirees. With this, the unfolding economic reality should trigger a new mode of thinking among workers, lest they will be left hanging when retirement comes knocking.

According to Robert Kiyosaki, author of the popular “Rich Dad, Poor Dad” series, people have two options if they want their hard-earned money to work for them. The first option is to leave the security of employment and start their own business. The second option is to start pouring their money into different types of income-generating assets such as mutual funds, bonds, and stocks.

Among the most popular forms of assets held by investors are stocks. As an income-generating asset, stocks can give decent returns for its owners in the form of dividends — representing the stockholder’s share of company profit or through the upward price movement of the stock.

Of course, the owner needs to sell the stock first before one records actual profit. On the opposite end, however, its capacity to provide higher returns also means that it can lead to heavy losses for owners, a lesson that all stockholders were painfully made aware of at the height of the crisis.

The popularity of stock market investing has led to the development of two main “schools” on the subject. The first one, technical analysis, is a method that depends on the price movement of the stock and the search for the short-term trend. Users of this method are also called “chartists” since they rely on charts to spot underlying trends in order to forecast the likely future movement of the stock. Given the method’s reliance on charts and trend spotting, technical analysis is often seen as the complete opposite (in terms of strategy) of the second school of thought, fundamental (or value) analysis.

Fundamental analysis looks at the conditions of the company as it is situated in the real world — its balance sheet, line of business, income statement, the economy in which it operates, and cash flow statements — so as to find the intrinsic value of the company. With this information, analysts evaluate the value of the stock; the decision rule prescribed is to purchase stock if it is selling at a price lower than its estimated value. In other words, investors try to buy stocks at a “discount” since in time, stock prices tend to adjust to the level equal to its intrinsic value.

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Apart from the strategies involved, there is also a crucial difference between the two when it comes to their timeframe. Technical investors typically have a shorter investment timeframe than fundamental investors. While technical investors look at the coming months, weeks, and days, fundamental investors look at the coming years. But, even though these two schools of thought seem divergent, there are still some who try and successfully combine the two frameworks together in order to come up with a style of their own.

Empirically, studies have shown that fundamental analysis and technical analysis are, on average, equally successful. As such, it is no wonder then that the question on which is better, and which is to be used, would depend on the investor’s preferences and in his confidence in a particular method. A well-known advocate of technical analysis is multi-billionaire George Soros, Chairman of Soros Fund Management, LLC; Warren Buffett may be classified as a fundamentalist.

Ultimately, an investor is free to choose which school of thought he would advocate (if not to create his own style). And with the scores tied, an investor’s main concern would be the procedures and complexities involved in each method, and the adaptability of each to his own set of preferences and constraints.

The Institute for Development and Econometric Analysis, Inc. (IDEA) is an economic think-tank based in the University of the Philippines – Diliman. For inquiries on IDEA, please contact Eduard Robleza at [email protected]