Posts Tagged ‘fundamental analysis’
Thursday, January 5th, 2012
When studying fundamental analysis, investors can use either the top-down approach or bottom-up approach. Both approaches help investors search for the best stocks to invest in.
1) Top-down approach – This approach involves looking at the “big picture” in the economy and then breaking it down into details. Fundamental analysts study both international and national economic indicators, such as the GDP rate, energy prices, inflation rate, and interest rate. After considering all the economic factors and looking at the “big picture,” different sectors are analyzed to identify the industry that generates the best returns. Then, investors look at individual companies within the selected industry to determine the best company in that industry, adding that company’s stock to their portfolio. A disadvantage to this approach is that investors may miss good companies that are performing strong just because they are in a depressed sector.
2) Bottom-up approach – This approach involves starting with specific companies rather than on the industry in which the companies operate. Unlike the top-down approach where the investor looks at the big picture, here the investor focuses his analysis on individual stocks. This approach assumes that a company can do perform well even if the industry it is in is not. Investors who use this approach simply look for companies with strong prospects, regardless of industry conditions or economic factors. A disadvantage is that investors will have different opinions on what a “strong prospect” is. For example, some investors may look at earnings growth while others may look at P/E ratios.
Many investors prefer the top-down approach and recommend others to examine both the economic and industry factors before deciding on which stock to purchase, which the bottom-up approach neglects to do. However, legendary investors Benjamin Graham, Warren Buffett, and Peter Lynch favor the bottom-up approach, saying that macroeconomics is a major distraction, as the projection might turn out to be incorrect. They believe that investors should concentrate their efforts on studying the quality of the individual companies.
The top-down and bottom-up approach are two distinct approaches to investing. However, some investors choose to combine the two approaches to select their stocks.
Tags: benjamin graham, bottom up approach, fundamental analysis, peter lynch, top down approach, warren buffett
Posted in Daily Stock Picks | Comments Off
Wednesday, January 4th, 2012
Want to know the method some of our legendary investors use? Benjamin Graham and Warren Buffett both use fundamental analysis and value-investing techniques. Unlike technical analysis, fundamental analysis focuses on studying a company’s financial statements and earnings. By looking at the financial aspects of a company, such as its revenues, expenses, assets, and liabilities, fundamental analysts can use this information to predict future price movements of a company’s stock. However, fundamental analysis has a larger selection of indicators than technical analysis and appears in many different forms, such as studying economic indicators and reports released by the Federal Reserve.
One advantage of studying fundamental analysis is its objectivity, supported by mathematical and statistical methods. Fundamental analysis helps to identify the intrinsic value of a security by studying economic, financial, and other qualitative and quantitative factors. By using fundamental analysis and studying a considerable amount of research, an investor can better understand the company’s business and key factors that drive their revenue. Another advantage is that fundamental analysis identifies long-term investment opportunities based on long-term trends.
However, fundamental analysis does have its disadvantages. One disadvantage is that since fundamental analysis requires a lot of research, it is labor intensive and time-consuming. Some of us who work daily are too busy to go through a million news reports and economic data. Those people can consider using technical analysis, which focuses on price action. Technical analysis seems to be the preferred method for short-term traders.
Another disadvantage of fundamental analysis is that the analysis ignores much of what is happening in the stock market. They may miss out on short term opportunities that price patterns may bring.
In the end, you should consider using both technical analysis and fundamental analysis. A mix of technical and fundamental analysis can help you better predict a company’s future performance.
Tags: benjamin graham, fundamental analysis, Technical Analysis, warren buffett
Posted in Learn The Stock Market | Comments Off
Monday, July 20th, 2009
Learn the Stock Market Lesson — What is Fundamental Analysis?
Fundamental analysis is the study of economic forces that cause prices to move higher, lower, or stay the same. This method is different from technical analysis, which concentrates on the study of market action. In other words, fundamentalists study the causes of market movement, while technicians study the effect. However, both help you determine the direction that prices are likely to move and it is recommended that you study both methods.
The main idea of fundamental analysis is to find out the company’s intrinsic value by studying qualitative and quantitative factors. Quantitative factors are numerical and can be measured. Such factors include a company’s financial statements. As a fundamentalist, you need to know the company’s expenses, revenues, assets, and liabilities. Questions to keep in mind when studying fundamental analysis are:
-Is the company actually making profit?
-Are the company’s sales increasing?
-Is the company’s revenue growing?
-How much does the company own in debt?
-Are they able to repay its debt?
This means you should be spending a lot of time studying the company’s balance sheets, income statements, and cash flow statements to gain insight on the company’s future performance.
Qualitative factors are based on the quality of the company that are impossible to quantify, such as its quality of management. Other factors to consider are its organization, competition, and regulation (certain regulations might limit potential profits).
How does fundamental analysis compare to technical analysis? Which method should you use?
Many traders believe that technical analysis is a more effective approach because, by definition, the technical approach includes the fundamental. Technicians believe that anything affecting the price, such as fundamentally or psychologically, will be reflected on charts. Thus, they believe that the study of fundamental becomes unnecessary. However, the reverse is not true.
Again, this is not as to say that technical analysis is better than fundamental analysis, or vice versa. Keep in mind that there are times when there are conflicts between the charts and fundamentals, causing discrepancies. Some traders choose to use only one approach and if you don’t want to use both approaches, make sure you try both of them first and find out the one that works better for you.
Tags: asset, balance sheets, cash flow statements, expenses, financial statements, fundamental analysis, fundamentalist, income statements, liabilities, qualitative quantitative factors fundamental analysis, revenue, Technical Analysis, technician, the stock market
Posted in Learn The Stock Market | 1 Comment »
Saturday, June 20th, 2009
Learn The Stock Market Lesson - How Coupons And Sales Relate to Trading
Coupons. A penny saved is a penny earned. Do not feel embarrassed about using a coupon that is only fifty cents discounted off the original price. This saving can contribute to paying off some of your ridiculous transaction commissions that our online trading broker website robs from us (E-Trade, Scott-Trade, etc.). Eight dollars for a transaction just to buy some stocks and another eight just to sell them? That’s absurd, especially if you haven’t made any profit from the stock. These commissions do contribute to losses and minimizes our profits! So every penny saved helps.
But watch out for those coupons. They can be evil sometimes. In a sense, coupons lure you in to buy the items that you might not need at all. This again relates to trading: don’t buy a stock simply because it looks good, without appropriately studying the stock or having a reasonable trading method. Just like how you shouldn’t use the coupon because the item is at a cheaper price, you should not buy a stock simply because it is cheap. For example: penny stocks. Most of us can afford to buy a couple of penny stocks but why do we not? There is a very high risk to them and therefore, we cannot associate buying something only because they’re cheap. Cheap prices are attractive but sometimes we need to control our desires if we still want to have some decent amount of money in our bank.
Also, just because an item has dropped in price (perhaps due to the coupon or a sale), which makes it cheaper than it initially was, does not mean that you should buy it. Many of us do so because we believe that the price of the item will go back up so we tend to take advantage of sales and coupons, even for those items that we do not need. However, we have to be careful to not use the same method when it comes to trading! It is so easy to get attracted to cheap, fallen prices but remember: We cannot buy a stock just because it has dropped in price, thinking foolishly that the stock “has” to go back up with no apparent reason other than that it “has” to! That would be speculation. What comes up most often comes down at times, but what comes down…unfortunately does not always come back up all the time (as you can probably tell from all our bankrupt companies). Therefore, we cannot assume that the stock price will go up. The stock market has no guarantees: the stock can keep going down and disappear…and so can your investments.
I agree that the idea of buying a large block of $1, $2, or $5 stock and watching it double is exciting. The only problem is that your odds of winning the lottery may be better. Here’s the fact: investing in stocks is not the same thing as buying a car or a shirt on sale. Cheap stocks involve far greater risk. A historical fact is that of best-performing stocks in the last 45 years, the average per share price before it doubled or tripled was $28 a share.
Given this comparison between coupons, sales, and trading, I hope you do not let prices and its mere appearance (without studying, perhaps, fundamental analysis or technical analysis) affect your decision whether or not to buy a stock. Think before you act.
Tags: bankrupt, commission, coupon, e-trade, fundamental analysis, investing, penny stocks, risk, scott-trade, speculation, Technical Analysis, trading, volatile
Posted in Learn The Stock Market | Comments Off
Thursday, May 28th, 2009
Learn The Stock Market Lesson - Bears, Bulls, Hogs, And Sheep
Legend has it that Wall Street was named after a wall that was designed to keep farm animals from wandering around Manhattan. Today, four animals are still frequently mentioned on Wall Street: bears and bulls, hogs and sheep. Stock traders often say, “Bulls make money, bears make money, but hogs get slaughtered.”
Here is how you can remember each of the 4 animals and what they symbolize:
Bulls- When a bull attacks, he has a tendency to lower his horns and strike upwards. Therefore, the term “bull market,” means a rising stock market. A bull is a buyer – a person who bets on a rally and profits from a rise in prices. The trader would also be known as a bullish trader.
Bears- A bear fights with its paw, striking downwards. Therefore, the term “bear market,” means a falling stock market. A bear is a seller – a person who bets on a decline and profits from a fall in prices. The trader would also be known as a bearish trader.
Hogs/Pigs- Hogs are greedy and get slaughtered when he loses site of his original strategy and becomes too greedy. They are tempted to buy shares which they cannot afford due to their greed of being able to make quick cash. They are often unable to control their emotions, panic, and make bad decisions, which is why they get slaughtered in the long run. Some hogs overstay their positions—waiting for profits to get bigger even after the trend has reversed itself.
Sheep- Sheep usually has no trading strategy. In Dr. Alexander Elder’s wonderful book, “Trading for a Living,” he describes sheep as being “passive and fearful followers of trends, tips, and gurus…You recognize them by their pitiful bleating when the market becomes volatile.”
What happens during the open market?
Bulls are buying, bears are selling, hogs and sheep get trampled while the undecided traders wait on the sidelines, watching and waiting for the “right” time to come in. A trade occurs when there is a consensus between a buyer and a seller—either a bull agrees to a seller’s terms and pays, or a bear agrees to a buy’s terms and sells a little cheaper. The presence of undecided traders puts pressure on both bulls and bears because the buyer knows that if he waits too long, another trader can step in, snagging away his bargain. A seller knows that if he holds out on a high price for a long period of time, another trader may step in, trying to sell at a lower price. This pressure leads buyers and sellers to come to consent of a price, causing a transaction to be processed.
Keep in mind that without a distinct and disciplined trading strategy and using techniques such as technical analysis and fundamental analysis, you may become either a hog or a sheep and you will eventually be washed out by the market. (I will be discussing some trading techniques such as technical and fundamental in a later post).
Source Used: Trading for a Living: Psychology, Trading Tactics, Money Management Written by Dr. Alexander Elder
(This is a GREAT beginner’s book. I recommend everyone to at least read this book, if not own a copy of it. It is pretty cheap on Amazon.com if you want your own copy or you can look in your local library.)
Tags: alexander elder, bear market, bears, bull market, bulls, fundamental analysis, hogs, price, sheep, stock market, Technical Analysis, trading for a living, wall street
Posted in Learn The Stock Market | Comments Off
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