We always hear people take pride in stock investing. However, there are a lot of untold bad stories. An example would be a broker tipping an investor about a particular "hot" stock. As the tip breeds rumors and speculation around town, the investor gets fixated with the fantasy that this stock will sky rocket and earn him millions. He then pours all his funds including his retirement plan and his house mortgage to this "hot" stock. A few years later, you meet this same man, in the subway, looking like a kid whose candy was snatched away. Not a pretty story.

Investing in stocks should not be made based solely on stock tips - especially rumors and speculation. Even news and reports should be scrutinized before using it as a basis of an investment. Otherwise, the investor is merely throwing a dice on the table and can easily lose money.

Making investments in the financial markets require a great deal of responsibility. It requires careful study and planning of every action you make from analysis, planning, up to the actual execution of your plans. There has to be a system or a proper manner to go about making investments. To know more about the logic behind trading systems, read here.

Much like in any profession, investment planning requires tools to craft a good investment design. These tools are invaluable to one's investment success and endurance. The financial market industry is a big battle ground where you can easily get pinned down if you are not well equipped.

There are two major types of analysis or tools in studying the financial markets - Fundamental Analysis and Technical Analysis. There has been much debate on which is more superior than the other. However, what we will do is explain how to use each method and what application/s it is best suited for. We will try to explain as simple as possible.

The rationale behind fundamental analysis is the study of a company's performance and the general economic condition of the country/region where that company is listed. The performance is quantified by using many different financial reports and figures such as the Income Statement, Balance Sheet, Cash Flow, Price to Earnings Ratio, Earnings Per Share, Net Asset Value, and so much more.

These information are used as basis to determine if the current price of the company in the stock market is cheap, or of fair value, and is worth buying. If the price is cheap, it will cause an investor to buy the stock in the market because it is below par. When the price goes above par, they see it expensive, thereby selling their shares.

Besides computing for the valuation of the company and comparing it to the current stock price, other fundamental analysts also factor in the company's future projects and plans. Business expansion plans of a company can give a good impression. Corporate changes such as a change in CEO, company buy-ins/buy-outs, declining sales, product recalls, law-suits, rumors and speculation are also other factors to consider as they affect the company's outlook. It does not end here.

The problem of the investor now is that not all factors have an equivalent figure for him to use to compute the fair value. For example, one cannot easily determine how much the law-suit expenses are or how much value there is to have a new, younger and effective CEO. Thus, computing for the worth of a company can be anyone's guess.

These are the micro economic considerations so far. What about the macro economic perspective such as the country's economic performance? GDP (Gross Domestic Product) and GNP (Gross National Product) are some macro economic valuations one can use, but how does one factor these valuations to a company's stock price? What about the issues of national security, poverty, inflation, war, crime rate and even politics? Are all these things part of what an investor should consider? When you use fundamental analysis, yes.

Technical analysis on the other hand, concentrates on the study of price movements based on charts to forecast future price movements. Here, traders focus on spotting buy and sell signals based on the movement of price in the chart. It gives the trader an idea where the price is going. When it goes up, the trader buys the stock. When it goes down, the trader sells the stock.

The focus on technical analysis is to study the demand and supply of a specific stock based on price and volume of transactions. Rising prices accompanied by rising volume indicate an increase of demand from investors. Declining prices coupled with increasing volume mark a sell off of the stock, large supply with weak demand. With this, it shows that with the use of technical analysis, we clearly see mass psychology and behavior of the market towards a specific stock.

Most traders admire the simplicity of using technical analysis. The trader does not need to analyze enormous amount of information to come up with a reason to buy. He only focuses on price and volume of the stock in the chart and he is ready to execute a trade.

The choice of which tool an investor uses is purely preferential. Some are hard core fundamentalists, others are technical purists. Mixing both is also applicable in some situations. Fundamental analysis best applies for people who go for long term investing. By long term, it means years of waiting and giving full trust to the company's performance.

Technical analysis is more flexible since it applies to both traders and investors. A trader is someone who trades in short periods of time, i.e. a day, a week, a couple of months, a year to years. Technical analysis fits their style because it can give buy and sell signals in different time frames.

Some people mix both by using fundamental analysis first to pick a stable and well-performing company and technical analysis after for mere entry purposes.

Being new in the financial markets, it is essential for you to learn a tool that you can use and be comfortable with.

To be continued..