Two Essential Methods in Margin Trading: Fundamental and Technical Analyses

2019/06/12

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How do you analyze your business?  Are you satisfied with your current strategy, or do you need more inputs? If you are an investor, it will be beneficial if you do the appropriate stock analysis to find potentially lucrative stocks. Do you know that there are two essential methods most stockholders conduct that you can utilize for you to become efficient in the stock market? Read this article as it will discuss the basics of the two types of analyses that can be useful to your business, especially in margin trading.

Fundamental Analysis

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Fundamental analysis is the process wherein stakeholders attempt to gauge the intrinsic value (the real value) of a stock. In other words, they study what the stock should cost by considering associated economic and monetary factors. This process is one of the means of measuring the health of a share.

Investors focus on fundamentals, which are broken down into two categories, to improve the performance of their portfolio:

  • Quantitative data: This is information about anything that can be measured in numeral terms. You need this data for many reasons like when you are designing your product, conducting a customer survey, doing inventory, deciding on the size of your business, and many others. Examples of quantitative data are quantities, such as the number of your employees, the number of hours you stay in front of the computer, the total revenue of your business for this year, etc.
  • Qualitative data: This is information that is impossible to be measured with numbers. Qualitative information will help you understand the language your customers speak because it is the data that characterizes and approximates. Examples of qualitative data are qualities (based on the character of the variable), such as the quality of service you provide to your customers, how you communicate with your clients, your strategy in resolving business issues, etc.

Good to know: Quantitative and qualitative analyses are different from each other, but they are both essential to investors to make a sound investment conclusion.

Moving forward, stockholders look into earnings, revenues, return on equity, profit margin, future growth, and other data to identify the company’s essential value and capability for next progression through fundamental analysis. Processing fundamental analysis helps long-term investors to make a wiser decision on whether to purchase, sell, or keep stock for an extended period by matching the intrinsic value of the stock to the market price for healthy long-term returns. This process gives you the knowledge to quickly notice a discrepancy between the intrinsic value and the market value.

Good to know: Some investors strategize by doing the buy-and-hold tactic. It is a passive investment technique, also known as position trading, wherein a shareholder purchases stocks (or other types of securities), then holds them without regard to fluctuations in the market.

Technical Analysis

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Unlike fundamental analysis that depends on the data that spans years, the technical analysis is more natural to process and typically ideal for short-term stock exchange because you can collect data from short periods. This process allows you to study the supply and demand of stock within the market. It’s another essential tool to make conclusions with the best perspective possible.

Through technical study, you can predict impending price movements by utilizing historical data on the volume, price, and other metrics. In technical analysis, you will mostly use charts and graphical representations of the stock to monitor and examine patterns that can guess price change. By reviewing them based on previous performance data, you become more aware of the condition of the stock, and you will have time to prepare and improve your strategy.

Trends analysis — a significant technique used in technical analysis — can help you quickly size up or down stock by observing the recent trend data. Moreover, going back to previous data is your way to forecast the future.

Types of Trends

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Market price movements happen because of the impact of several things, including political, psychological, and economic factors. In the stock market, price changes showing a specific direction, and there are three known types of trends, such as the following:

  • Upward Trend / Bullish: This is a representation of a prolonged period in which investment prices rise.
  • Downtrend / Bearish: This displays a prolonged period in which investment costs fall.
  • Sideways Trend: This is a representation of an investment trend that doesn’t show any of the following —rising or falling. Investors anticipate that when the sideways direction ends, it leads to any of these possibilities — the start of either an upward trend or downtrend.

Good to know: In trend analysis, investors consider three time frames — short, intermediate, and long-term.

Which Type of Analysis is Better?

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You now know the key distinction between fundamental and technical methodologies, as mentioned above. Just to recap, fundamental analysis focuses more on intrinsic value that leads to an assumption that markets are often wrong when pricing a stock or security. It uncovers the inherent value of the share in question. Contrarily, the technical analysis does not make an effort to gauge the intrinsic value. Instead, it studies the figures created over time by market action with reference to the security.

The two types of methodologies mentioned above have their proponents and detractors, depending on the investment strategy and philosophy of the stockholder.  But, considering both methods can help you to gain more benefits it comes to investing. The fundamental analysis will serve as your guide to select the appropriate business to invest in, while the technical analysis will give you an idea when you should purchase and sell stocks. While some stakeholders prefer the utilization of a single analysis mode to examine long-term reserves, a mix of fundamental and technical analyses will benefit you more in margin trading.

One More Thing Before You Go

If you are into margin trading, utilizing the two methods mentioned above — fundamental and technical analyses — will help you to manage your portfolio correctly. Through a mix of these studies, you’ll have an edge to see the complete picture of the stock and make more informed deals.

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