Stock investors are generally one of two types:
Technicians, also known as chartists, forecast future stock prices by using past price trends. They tend to buy and sell stock in a short time, sometimes within an hour. The chartists, who chart past stock price patterns, ignore fundamental factors, such as book values, dividends, and earnings. They buy and sell stock by identifying the trend of stock price movements.
For example, they use a popular tool called 200-day moving averages (the arithmetic average of the past 200 days of stock closing prices) to determine the time to buy and sell stocks. When stock prices rise above the 200-day moving average, technicians buy the stock. When current prices fall below the average, they sell the stock.
Although there are followers of technical traders in the stock market, young investors should be aware of the high transaction costs and high taxes when trading stock frequently; moreover, they should consider the emotional pressure of following the daily ups and downs of the short-term market.
Fundamentalists are also called value investors. They look for the value growth of a company in the long-run. Fundamentalists look at factors such as earnings, dividends, and book values. They expect stock prices to go up as earnings of the company grow. They use a buy-and-hold approach in stock investing.
Unlike technicians, fundamentalists ignore the daily ups and downs of the market. If the stock price drops due to market rumors, they view the drop as an opportunity to buy more stock at a lower price. They believe that in the long run, if one buys stocks of well-managed and solid, growing companies, the stock price will eventually reflect the performance of these companies. To take advantage of rising stock prices of growing companies, young investors should do their homework and select stocks carefully.