Article 2: Different Stock Picking Approaches

There is not any single defined approach to achieve success in stock picking.

Value investing approach: Focus on investing in stocks that were selling at a discount to their fair value.

Growth Investing approach. : Focus on investing in stocks that were capable of growing at a faster pace as compared to their peers. Here you need to pay premium because of higher growth rather than buying at discount to fair value

Fundamental Analysis approach: Here, focus is on Understanding business of Company.

Technical Analysis approach: Here, focus is on analyzing charts of the past movements of a stock’s price and its trading volume over the different time periods.

Comparison Between Fundamental Analysis And Technical Analysis :

Fundamental analysis treats stock investment as a way of having ownership in a company’s business. On the other hand, Technical analysis tries to predict the next ‘up move’ in a stock’s price and is indifferent to the company’s business.

Comparison between Value investing and Growth investing Approaches:

If an investment decision goes wrong, then the risk of suffering losses is much more in growth investing, as it does not focus on the current valuation of the stock price. If a company selected by growth investing approach does not grow as expected or its growth slows down a bit, the stock market will punish its stock. In such a case, the stock prices will fall very fast and the investor might lose a lot of her invested capital.

However, in case of companies selected by value investing, if the stock market does not realize the discount available in the stock of a company soon, then its stock price might not increase in the short term. However, it would provide the investor with an opportunity to accumulate more stocks of this company. Thus value investing approach has a higher “Margin of Safety”.

 

Conclusion

Any person who wants to be an investor can learn about these approaches for stock picking. The investor can focus on the approaches which she finds suitable for her according to her temperament, work schedule, life style etc. The investor can choose to pick the best of the characteristics of various stock picking approaches and mix them to create an approach of her own.

Once the investor has decided about her stock picking approach, she should start searching for companies whose stocks meet her criteria. The investor should keep on improvising her approach by incorporating lessons, which she would learn from further readings and personal experiences in stock picking.