Pitting The Debt To Equity Ratio To Work

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The Debt to Equity Ratio is a comparison of a company’s debt (or liabilities) as compared to its equity (assets over and above liabilities), or more familiarly, its “net worth”.

Fundamental vs. Technical Analysis

When it comes to trading and investing, the length of time in an investment should be taken into consideration. For many traders, their time horizon is fairly short-term, from months to weeks to days or even for some, mere minutes or even seconds.

Most investors, on the other hand, are “in it for the long haul”. They can be in an investment for several months to many years.

The question then becomes, how do you evaluate an investment to determine if it’s a good time to buy, hold, or sell?

There are two primary ways of doing that: technical and fundamental analysis. Technical analysis looks at a company’s stock chart trying to find trends, areas of support and resistance, etc., to determine the timing of getting into (or out of) a trade.

Fundamental analysis instead focuses on the company itself: how its run (the management team), what kind of liabilities it has, the industry it’s in, prospective new or future business partnerships or opportunities, etc..

As you might imagine, the trader who is in and out of a trade in a few minutes probably has little concern over a company’s prospects 5 to 10 years out.

Likewise, an investor with a 10-year time horizon isn’t likely to be interested in a company that happens to be a good buy based on a five-minute chart if the company itself is in debt to its eyeballs and has no foreseeable prospects and half the management team is bailing ship.

Rather than one being “better” than the other, technical and fundamental analysis are partners when it comes to investing. They have an inverse relationship based on how long you expect to be in a given investment/trade.

The longer you expect to be in a trade, the more fundamental analysis “outweighs” technical analysis. Conversely, the shorter you expect to be in a trade, the more technical analysis “outweighs” fundamental analysis.

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