How can the Casual Investor Beat the Market

To beat the market, a casual investor should consider employing two strategies in conjunction with each other- fundamental analysis followed by technical analysis. Fundamental analysis consists of trying to determine the actual business value of a company before buying its stock. Technical analysis essentially tries to predict which way the price of the stock will go, by sizing up the supply and demand for the stock.

The trick to successful fundamental analysis is finding the stock of a solid company trading in the market for an attractive price. To determine whether a company is solid, one may need to consider the company’s position in its field. Does the company have a solid reputation among its customers; are its competitors afraid of it; does it consistently have high profit margins that can be sustained into the future?

Once a solid company is identified, the next step in fundamental analysis would be to consider the current price of the stock. Is the current price per share a good deal relative to the company’s earnings, its book value, or its dividends? To determine whether this is the case, it may be helpful to look up the historical averages for these factors, or to review a few primers on value investing.

When a stock passes the test of fundamental analysis, the next step is to conduct some technical analysis to decide when to buy. The fact is that a stock’s price is determined by buyers and sellers in a marketplace. It is almost like an institutionalized popularity contest. If the stock is loathed and everyone wants to sell based on bad news or poor perception, the price of the stock will fall. If, on the other hand, the stock is loved and everyone wants to jump on the bandwagon and buy, the price will rise.

To determine whether the price is likely to rise or fall in the future, technical analysis focuses on various factors such as volume, moving averages, and Bollinger bands, among others. There are many resources that can be found on-line that will explain the basics of technical analysis.

So, for a casual investor to beat the market, the trick is to find a solid company trading at a bargain price based on the company’s fundamental value. Then, when technical analysis indicates that the time is right, to make the buy. This way a casual investor can own stock in a great company, at a great price, that was purchased at just the right time.