TOPIC 2: DIRECT INVESTING
Financial market offers you two basic investment choices: debt or equity
Debt represents a promise to pay. A borrower is required to make interest payments, if any, according to
a schedule that’s set when the loan is made. Th e borrower eventually has to repay the full amount and
possibly a little extra.
Equity means full or partial ownership. Entire companies are bought and sold in the stock market along
with their shares. Gold, other commodities, and real estate change hands through markets as well.
KEY POINTS:
Governments and companies raise money from investors in primary markets.
Investors buy from and sell to each other in secondary markets.
Three basic types of analysis help investors decide whether to go long or short. Some investors rely on one
type, and others combine them in search of investments most likely to rise or fall.
1. Fundamental analysis focuses on the prospects for governments, companies, or hard assets. The
analysis can take what’s known as a top-down or a bottom-up approach. Top-down analysis
begins by looking at overall economic and business conditions.
Bottom-up analysis begins by considering the outlook for a specific government, company, or
asset.
2. Technical analysis is the study of prices and other data to determine trading patterns.
If a chart shows that a stock fell to $20 and rebounded twice in six months, then a technical analyst
may conclude that the next retreat to $20 will attract enough buyers to lead to a rebound. Sales,
earnings, and other fundamental data aren’t part of the picture.
3. Quantitative analysis relies on number crunching. Financial and trading statistics and other data
are collected and run through mathematical formulas programmed into computers. Th e results
are used to guide investment decisions. The people doing the analysis are known as rocket
scientists or quants, because their work is relatively complex.
