Two major pools of thought on Wall Street are technical and fundamental analysis. Each has intrinsically different assumptions about the market. Everyday investors should familiarize themselves with the philosophy of the financial advisors handling their money.
Technical Analysis
Technical analysts believe that market prices reflect all information. This includes annual reports, private management insight, and even news headlines that aren’t too shocking. There are no inefficiencies in this, which makes the process of finding undervalued stocks a futile effort.
Therefore, a wide array of mathematical indicators from recent performance should accurately forecast future prices. Among such trends, one of the most common is moving averages. Moving averages are the daily averages of the most recent periods of time, such as 50, 100, or 200 days. The strategies behind technical analysis prioritize short-term price fluctuations in the near future.
About 10% of Wall Street are “technicians.” Critics claim technical indicators are rather arbitrary and prone to false signals, leading to inaccurate predictions of market sentiment, as it overlooks the reasons behind price movements.
Fundamental Analysis
On the other hand, fundamental analysts believe the market is inefficient when current prices do not reflect fair value. Market prices do not necessarily reflect all publicly available or insider information. Fundamental analysis aims to project long-term price potential to maximize long-term gains and outperform the market.
Thus, investors can forecast future cash flows, examine the “why” behind stock movements, and use complex models to ascertain the fair value of stocks. One of the favored models is the free cash flow model, which forecasts cash flows and determines a reasonable range of future prices based on them.
Fundamental analysis is deemed time-consuming and entails subjective inputs, sometimes resulting in a wide range of opinions among professional analysts.
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First State’s Gold Chip philosophy has a 50-year history of helping achieve client growth objectives. For a free consultation with Tulsa financial advisors, contact us at 918-492-1361.