Active management is picking individual companies and stocks to buy and sell. The goal for an active management strategy is to pick assets (stocks) that will go up in value by more than the S&P 500 or other benchmark. To pick the stocks, you need to use either technical or fundamental analysis. Fundamental analysis focuses on the financial health of the company and underlying accounting statements to give you an idea of how much profit and cash flow you can expect from the company. If a company is solidly profitable it reflects a less degree of risk rather than investing in a company that loses money.
Understanding the three basic accounting statements: Balance Sheet, Income Statement and Cash Flow Statement can give you a better idea about the health of the underlying company. These statements are published on an annual and quarterly basis in documents labeled “10K, 10Q”. These annual and quarterly reports are extremely important for investors to read and understand, as they often tell you intricate details about the company’s business practices and risks. Not all companies are create alike in the stock market and some are financially better than others.
One thing to understand is the share price doesn’t tell you anything. A low share price or high share price have little significance. What tells you the true value of the company is “market capitalization”. This is the value of the company as it trades in the stock market. Market capitalization is the only value you should follow and understand that shares are just a portion of ownership in the company. Larger companies are believed to have less risk because their share prices are less volatile. Where as “penny stocks” are considered highest risk and should be avoided at all costs.
Technical analysis focuses only on the pricing action and patterns formed in the pricing charts. Typically most people either follow fundamental analysis or technical, but generally not both. A technical analyst will typically only focus on the chart and ignore any underlying fundamentals in a company. They only care about identifying opportunities to enter and exit stocks are a profit.
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