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Investment Analysis: Fundamentals, Indicators, or Maybe Just Sentiment

Investment Analysis

If you’ve been investing for any amount of time, you’ve probably noticed something. Everyone has different investment analysis methods and strategies for picking their moves, and people seem to be both failing and succeeding with multiple different ones. So, what gives? If there’s no objectively reliable method to take us to the moon, how do you decide what to buy?

The evaluative criteria used for determining how to move in the market is as elusive as can be. Simply put, there’s more than one way to cook an egg, but that can give some of us investors a case of analysis paralysis, where we end up not deciding at all. So, what’s the solution? Open-mindedness and accepting that there are a lot of ways to profit or have a loss. 

Investment analysis fundamentals

Two of the most common terms of investment analysis you’ve likely heard mentioned are: technical and fundamental analysis. While, to some extent, both tactics seek to make a sound and profitable decision, the way that they come to their conclusions is much different. Here are some examples of both forms of investment analysis:

Technical analysis: 

In essence, technical analysis involves using  price action and is often coupled with the use of chart indicators to help aid in the process. This strategy is most popular amongst shorter term traders or on short-term trades in general, sometimes even intraday. 

Investors use technical indicators like the short-term (12-30 day) EMA (exponential moving average) to determine if the stock sits above or below its average price for any given period. Although it’s popular with day and swing traders, long-term investors use the indicator over longer time spans, like the 50-200 day EMA. 

With other indicators like the RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence), investors attempt to gauge whether or not the price action is forming a bullish or bearish pattern, and are usually used in conjunction with levels of support and  resistance. 

Fundamental analysis: 

This type of investment analysis is, in a way, more complex and time-consuming than technical analysis. It involves taking into account details about the company itself, management, financials, and even macroeconomic factors and market forces that could play a role in the business’s success. 

Fundamental enthusiasts will use numbers like the P/E (Price to Earnings) ratio, PFFC (Price to Free Cash Flow) ratios, enterprise value, price to book, return on equity, debt to income, and the list could go on. Overall, the goal is to assess the intrinsic financial health of a company and generate an objective forward outlook for the business’s prospects of success, and invest long-term based on that. 

Why it often comes down to social sentiment

The dilemma is that most investments end up being a combination of all these things, as well as social sentiment. You may find a certain stock with great fundamental potential, but if no one’s talking about it, and the volume is on the floor, you probably don’t buy it unless you’re extremely involved and convinced. 

This is where investor and social sentiment comes in and why, in the end, it’s the driver behind the movement of many stocks and their subsequent prices. A lot of money has been made just by following trends, regardless of the underlying value of whatever you just bought and sold. 

Does that mean you should YOLO it all on a penny stock just because it’s trending on Reddit? Of course not, but with the proper amount of discretion and risk management, keeping an ear to and anticipating the social waves of the market can be a profitable strategy, albeit a potentially risky and incomplete one. 

But, there’s no denying that it’s the millionaire-maker trend behind Gamestop and AMC’s skyrocket–and $CTRM, $SPRT, $BBIG, $CEI–or any of the stocks that jumped over the moon on nothing more than momentum trading.* 

All that being said, we feel compelled to bring some balance to the world by saying: relying on sentiment alone is not foolproof and can even have some major pitfalls. So, just watch out, fight the temptation to put all your eggs in one basket, and learn from failed experiments. All in all, it’s smart to leverage reliable data to help yourself make sound investment decisions. And, by the way, if this is more your style, you should check out the Front Stock Scores on the Front app. It’s data-driven stock analysis based on things like company financials, stock performance, ESG rating, and recent news, all wrapped up into a single number.

*Specific stocks mentioned on the Front blog are intended as examples, not as investment recommendations nor advice. Conduct your own research and due diligence before making any investment decisions.

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