If you are new to investing then you might be wondering how investors determine whether they should be buying or selling different assets. Although there is no way to be 100% positive about when you should invest in a certain asset, many investors will rely on investment indicators to help fuel their decisions. The types of investment indicators that an investor uses will depend on what type of investor they are.
In this article, we’re going to take a quick look at the different types of investors and a few examples of investment indicators that they use.
Fundamental analysis is a method for analyzing the intrinsic value of a stock based on different financial and economic factors. An investor who uses fundamental analysis is usually interested in trying to determine what a “fair” value for a stock is and then comparing it to the stock’s current price. Determining the stock’s fair value will give them insight as to whether the stock is over or undervalued.
To determine the stock’s fair value, a fundamental investor will look at different financial aspects of the company’s business and see how it relates to their stock price. For example, they might find out how much money a company earns per share of stock and then compare this to the stock’s current price.
A few investment indicators that a fundamental analyst uses are:
- Earnings per share
- Price to earnings ratio
- Dividend yield
That said, not all investors believe that they can determine what a stock’s fair value should be.
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While the fundamental analyst is trying to determine the fair value of a stock, the technical analyst assumes that the stock is already fairly valued. Instead, a technical trader analyzes trends behind the stock’s trading history to try and identify patterns. Technical traders believe that the past trading history of a stock can help predict where it will move in the future.
A few of the investment indicators that a technical analyst uses are:
- On-balance volume
- Accumulation/distribution line
- Average directional index
Now let’s take a look at the last common type of investor.
Macroeconomics is the study of how the overall market behaves. Therefore, macro investors will make investment decisions based on things that are happening in the economy as a whole. For example, Michael Burry, the famous investor from the Big Short, made his famous decision to short the housing market based on information related to the number of mortgages that were outstanding at the time.
Generally, macro investors will examine things that are going on in the larger economy and then make predictions on how these changes will impact certain companies.
Some of the information that macro investors will examine is:
- Inflation data
- GDP growth
- Changes in the national interest rate
- New governmental policies
These are just a few of the investment indicators that different investors will leverage to help make informed decisions! Keep in mind that almost all investors will blend at least two of these strategies before making decisions. We hope that you’ve found this article valuable when it comes to learning what investment indicators are. If you are interested in learning more, please subscribe below to get alerted of new articles as we write the