Equity investment is the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises.
An investor may buy shares, that is ownership equity, of a company or bonds, that is debt of a company. Diversification both between debt and equity and between different companies is often recommended as is the practice of "buying low and selling high," should one be so wise and quick.
To try to predict good stocks to invest in, two main schools of thought exist: technical analysis and fundamentals analysis. Opponents of the use of the past records of stocks as a gauge of future performance, as practiced in technical and fundamental analysis, can also invest via index investing.
Technical Analysis
Technical analysis is the use of statistics generated by market activity, such as price and volume, to predict future trends in that market. Technical analysis does not try analyize the financial data of a company such as cashflow, dividends and projection of future dividends. That type of analysis is called fundamental analysis.
Technical analysis is based on a variation of the efficient market hypothesis, which states that all participants in the stock market have equal and instantaneous access to all the information about stocks. Therefore, there is no need to analyze this information, since many other market participants are already doing so, and therefore this information is reflected in the price of the stock. Instead, adherents to this school merely analyze the graphs of the stock price history, trying to see patterns with past events.
The point of view of most traders who use technical analysis is that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transaction history. Until people agree on price but disagree on value, no transaction takes place. They believe that prior actions are useful as a guide to future actions. In particular that transaction data provides information about supply and demand at various price levels.
While technical analysis is widely used (if only as one input among many) by both professional and amateur traders as a means of predicting future market moves, it is generally not used by economists in any academic sense.
Fundamentals Analysis
Fundamentals analysis is a school of thought that is used when attempting to predict future trends in the stock market. The other school of thought is technical analysis.
Fundamentals analysis says that the best way to predict the future trends of a stock is to carefully understand the fundamental financial figures of the underlying company. For example, analysis of cashflow, examination of recent dividends and projection of future dividends. These can all be combined to calculate a theoretical value for the company. If the current stock price is lower than that indicated by this calculation, a trader who uses fundamentals analysis techniques would buy this stock. This technique is more likely to predict the dividend then the change in value of stock, since that is dependant on other people recognizing the same thing as the trader. Depending on the v-trend statistic for the stock it is more or less likely that the value will change in the way the trader believes the dividends will change.
Index Investing
Index investing, also called indexing, is a method of investing whereby a fund (or individual) buys the same stocks in the same proportions as in a target index. The objective of this method is to buy and hold the index. The idea is that technical analysis and fundamental analysis are flawed because they require the evaluation of the past performance of securities in order to predict future returns of the securities. It is impossible to accurately predict future returns based on the past records of securities, even on a short term basis.
The return acheived by indexing is the return of the index. If the index tracks a market sector, then the return is that of the sector. If the index tracks the market as a whole, then the return is that of the market. Practitioners of indexing make a conscious decision not to try to outperform the market, rather they decide to obtain the market return.
