Analysing the markets you want to trade

It’s not uncommon for new investors to stick to blue-chip companies – being established, reputable and financially stable firms – or exchange-traded products, such as exchange-traded funds (ETFs).

Buying shares in a global ETF is a good way to broaden your exposure. While it’s a good strategy, it’s not one that will outperform the market. By design, ETFs can only offer the average return of the market they track.

There are thousands of listed companies around the world. Some of them will experience meteoric growth, others will potter along for a decade and the rest will fold completely.

If you want your portfolio to outperform a market, you must learn how to identify investments that will experience good growth in their lifetime. So how do successful investors choose shares? Let’s find out.

The basics of fundamental analysis

Listed companies around the world are required to disclose financial and operational information. Using these publicly available details to determine whether to buy or sell a share is called fundamental analysis.

Having access to this information on a company makes it possible for shareholders to compare two companies using the same metrics.

For example, say you’re considering investing in Company A and Company B. They operate in the same industry and have an equal market share of their sector. You find that Company A has more employees and therefore higher operational costs.

From this information, you could conclude that Company A is less operationally efficient than Company B, making the latter a better investment.

However, your analysis should consider different outcomes because details about both companies could lead to opposite assumptions. For instance, you could just as easily conclude that Company A is better because Company B isn’t well positioned to handle increased demand should there be a shift in the market in future.

Access to this information also makes it possible to measure the performance of a company over time. This will help you work out if the company is doing better or worse than when you invested in it.

Consider the same example: Company B might increase turnover with the same workforce, making it more profitable. Or it might employ more people and still produce a similar turnover, meaning its cost base is growing but its profit is shrinking.

For a long-term investor, understanding how the company you’re investing in makes its money is critically important – especially if you buy individual shares. Buying shares is buying ownership of a business. Just as you wouldn’t buy a franchise without properly analysing it, the same due diligence should go into buying shares.

When you’re ready, take our fundamental analysis course where we explain the concept further and how you can put it into practice.

Understanding technical analysis

Long-term investors tend to favour fundamental analysis. However, market participants could also benefit from using another way of analysing a company’s performance called technical analysis.

For those that use this method, the main thing that matters is an asset’s share price. It’s often favoured by active market traders who buy and sell multiple shares or contracts in a day. A technical analyst won’t normally pay special attention to a company’s annual financial reports, but rather the impact on its share value.

Technical analysts rely on price data and the conclusions they can draw from their findings to make decisions. They use charts, indicators, drawings and different date ranges to answer just one question: will the price of this share go up or down?

Many investors and traders spend years perfecting a system that tells them at what price to buy and sell an investment. You can learn more about how to do this in our technical analysis course.

Using a combination of both fundamental and technical analysis can help you make important decisions about your investments.