In the earlier 2 articles on time and risk, basically that is about how you invest, or trade. After choosing a certain time horizon, time span, risk profile and risk management style, you decide on how your investment style is like. When you start talking about research, that determines how you decide your entry, exit, and what you look out for in your investment style.

Generally speaking, there are 2 main investment research styles. Fundamental Analysis is the art of looking at a company's management and finances, and possibly future potential, before deciding if the price is right for buying. Technical Analysis is the art of looking at the price movements of the stock, before deciding if the timing is good. However, just by saying that 2 statements, is barely scratching the surface.

Fundamental Analysis

Fundamental Analysis, as mentioned, is the art of looking at a company's (or country's) management (or economic condition), financial statements, competitive advantage. This can include many things like its competitors, its credit risk, etc.. This is done mainly by looking at its historical performance, and by using that as a basis of forecast, attempt to predict the company's future potential. Usually it is in this form of analysis where you will see financial ratios such as Price/Earnings (PE), quick ratio, sales turnover, price to book value, etc.

The basis behind fundamental analysis is also one that makes sense. That, while a market might misprice a stock over the short term, if the stock truely has value in it, then eventually the correct price would be reached. Thus, different types of investment styles will develop.

Buy and Hold investors basically believes in looking at the company's business and management, and if it can be seen that there is a large future potential for that business, they would buy into it. In that sense, they look upon themselves as co-owners to the business and that they are going to hold a stake in the company for a very long time. The best example for this is Warren Buffett. Warren Buffett believes into buying simple businesses, with fantastic management. As such, he managed to build huge stakes into companies such as Coca-Cola, See's Candy, American Express, Gillette.

Value investors are investors who find specifically for companies that are undervalued relative to the current price. Such cases could happen because of obscure businesses, or that the company has assets worth more than the total value of the shares, or that it was irrationally affected by broad market sentiments. As compared to buy and hold investors, value investors are looking for companies undervalued at present. Buy and hold investors, tend to look more at the future potential.

News investors are investors who look at immediate developments in the economy or sector, and tries to see how it would affect companies. An example could be looking at the growth of China, and decide that the shipping or commodities industry might be worth looking at. In a sense, they look at where the near term growth potential will be at, and focus at that area. And while a company might be a good company with great management and vision, it might actually languish for a long while. As such, most news investors like to look for catalysts. Catalysts, or events which sudddenly cause a stock or sector, or economy to come into the spotlight.

Technical Analysis

Technical Analysis, is the art of looking at the stock's current and historical price movements, before deciding if the timing is right. Over in this type of analysis, you would see things like candlesticks, fibonacci, chart patterns, moving averages, etc..

The proponents of technical analysis also have a pretty strong argument. The key point being that, a stock price is not related to a companies value. And that it is a number driven primarily by supply and demand and the psychology of the investors in the stock market.

Indicators are used quite frequently for analysis. Most charting softwares, comes with indicators such as stochastics, moving averages, histograms, volume, bolligner bands, etc.. Such indicators can be used for various objectives, such as measuring the momentum of the market, anticipating reversals of market trends, etc.. An example of using indicators could be, when the short moving average line crosses above a long moving average line, the trader buys the stock, and vice versa. We won't go into details here. Watch out for the future articles on Technical Analysis.

Chart patterns is a very interesting concept in technical analysis. Many analyst have observed that because the market is driven by market supply and demand and also by herd instinct, there are certain patterns formed in the prices. The observation behind this is that price movements of a stock is not a random process, and that while a market is made of many individual participants, it actually has a kind of intrinsic memory which 'remembers' certain prices. Such examples of this is when a price approaches a certain level, it tends to reverse, or have difficulty moving through. Thus, concepts such as support lines, resistance lines, fibonacci lines, head and shoulders formation, flag and pennants, triangles are created.

Statistics is yet another way of technical analysis. Statistics, or also called quantitative finance, believes that prices can be constructed into a model. A model that uses mathematical formulas, derivatives, and probability theory, to obtain future prices. Though not so commonly used by retail investors, quantitative finance has become a large part of robotic trading in an investment bank, especially when all you have to do is hire masters graduates and program a big supercomputer that does trading all by itself.

While the many types of investment styles seem so diverse and different, most investors and traders usually use more than 1 style at the same time. The question now is, what is the style that  would suit you?

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