What is value investing?
Value investing generally involves buying securities that appear under priced by some form of fundamental analysis
Value investors assume that stocks have underlying or fundamental economic values that are relatively stable and that can be measured. Value investors call this economic value “intrinsic value” and follow the strategy of buying securities when their share price is significantly below the calculated intrinsic value”. Graham referred to the gap between value and price as the “margin of safety”, which should be one half of the share price in order to buy the dollar for 50 cents (Benjamin Graham, David Dodd, Security Analysis, 1934).
What is fundamental stock analysis?
Fundamental stock analysis involves analyzing the financial statements of a company, its competitive advantages, competitors and markets. Fundamental analysis assumes that markets may misprice a security in the short run but that the “correct” price will eventually be reached. Profits can be made by purchasing the mispriced security and then waiting for the market to recognize its “mistake” and reprice the security.
Fundamental stock analysis vs technical analysis
Technical analysis in contrast maintains that all information is reflected already in the stock price. Hence, technical analysis avoids the analysis of financial statements, markets and economic values. Technical analysts focus on trading data (share price movements and volume figures) and try to predict the future share price based on its historic pattern. For example, momentum investors buy stocks that have had high returns in the past months in the expectation that they will continue to raise.