3 Financial Investment Theories to Help You Pick the Right Stock

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 When it comes to investing in stocks, everyone has their own ideas as to what strategy for purchase will make for the most fruitful investment. So much goes into the preparation for purchasing a valuable stock that many schools of thought have been made to find the stock that will prove to be the best option.

For those who are looking for a way to analyze and access stocks before buying them up, or if you’re looking for a reason to get rid of certain stocks, here are three common financial investment theories to help you out.

Fundamental Analysis

If you feel that the best way to look at a stock is by understanding it’s value, then Fundamental Analysis is the theory for you. According to Rohit Chhatwal of AmigoBulls.com, a person using Fundamental Analysis to weigh a stock would find the value of the stock by looking at its macroeconomics, the industry the company’s in, and the company itself.

This information can be found by analyzing the company’s finances on a quarterly basis. If you have the time to analyze months or even years of data with the confidence that you can look through the numbers to find actionable answers, Fundamental Analysis could be the best option to find if a stock is right for you.

Efficient Market Hypothesis

Efficient Market Hypothesis, commonly referred to as EMH, is a well known and controversial stock investing theory. EMH, according to Wikipedia, claims that its impossible to beat the stock market by looking to either purchase stocks for a cheaper price or sell stocks for an inflated price because stocks will always trade for their fair market value on the exchange.

Therefore, the only way to make more money by trading stocks than the market average is to participate in the trading of risky stock exchanges. If you’re interested in taking risks in the market in order to make it big, you may find yourself subscribing to the EMH school of thought, encouraging you to go after stocks that others may shy away from.

Prospect Theory

Also known as Loss Aversion Theory, Prospect Theory plays on human psychology for making stock purchasing decisions. This means it’s all about how information regarding a stock’s market performance is presented to a buyer that will determine if the stocks is picked up or not.

To illustrate this point, Investopedia states that if an investor was given the same options but one side was address in terms of gains while the other was addressed in terms of losses, the buyer would take the option that came in the form of a gain even though the two options are identical. If you’re looking to sell stocks that you are viewing in a negative light, look for someone who uses Prospect Theory and try to shine a positive light on the stock in order to sell it.

While these theories may help you to make more sense of the stocks market and how it works, there are no hard and fast laws when it comes to finance. But if you’re looking for assistance for analyzing stocks through a certain lense, picking one of these theories could help you find the answers you’re looking for.

 


Categories: Stock Market

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May 4, 2015 3 Financial Investment Theories to Help You Pick the Right Stock