We’ve discussed earlier that portfolio managers have the means to make decisions on your behalf when it comes to your investment. That’s because they have the experience as well as the expertise to recognize when a financial instrument presents the ideal opportunity for you to take as an investor. Question is, how do they do that?
The answer – their expertise is a result of their careful analysis of tools that are available for them. You, as an investor, should know what those are so that you can, at the least, be aware of what your portfolio managers are doing behind the scenes.
Here are the most common tools that are used in making investment decisions.
Charts are very helpful in providing anyone who’s interested with a tangible picture of what each particular financial instrument is doing in the market. Charts are universal – they are used in stocks, in mutual funds and other forms of investment that you can think of. Now, there are many forms of charts that are used for investing. However, they do nearly the same function – to provide a historical representation of the stock’s performance, particularly its price.
One good look at charts will show you the movement of the stock price, if you’re investing in stocks. An upward movement means that the price has increased, while a downward movement, obviously, means a decrease in prices. Through charts, you can see the trends in the rise and fall in prices so you can identify your exit and entry points.
Charts are good for following trends; however, to be able to make a decision, you need to be able to speculate or at least predict the trends. Being able to make a forecast on whether or not a stock will increase or decrease in stock prices will require you to spot possible indicators of a rise or decline. Investors and portfolio managers typically follow news reports covering a specific stock that they have invested in.
The idea is that a certain piece of news will have a reaction among investors, particularly the short-term ones. A pending change in the executive level, for instance, can possibly cause apprehension among investors. The usual reaction is to pull back on their investment, which will cause a slight drop in prices. In some cases, it causes an avalanche movement, resulting to a drastic drop in prices that, however, return to normal as soon as outlook in the company improves.
On the other hand, a positive piece of news will cause prices to go up. This represents a potential entry point that you can take advantage of, especially if you’ve an eye for short-term investment.
These two particular tools are very useful for short term investment, in which buyers gain the most by taking advantage of price movement based on news reports. Managers make use of both when making decisions – they use charts to spot upward movements, and then use news reports to justify the rise in prices before deciding to make an entry.