Investors come in many shapes and forms, so to speak, but there are two basic types. First and most common is the more conservative type, who will choose a stock by viewing and researching the basic value of a company. This belief is based on the assumption that so long as a company is run well and continues turning a profit, the stock price will rise. These investors try to buy growth stocks, those that appear most likely to continue growing for a longer term.
The second but less common type of investor attempts to estimate how the market may behave based purely on the psychology of the market’s people and other similar market factors. The second type of investor is more commonly called a “Quant.” This investor assumes that the price of a stock will soar as buyers keep bidding back and forth (often regardless of the stock’s value), much like an auction. They often take much higher risks with higher potential returns-but with much higher potential for higher losses if they fail.
To find the stock’s inherent value, investors must consider many factors. When a stock’s price is consistent with its value, it will have reached the target goal of an “efficient” market. The efficient market theory states that stocks are always correctly priced since everything publicly known about the stock is reflected in its market price. This theory also implies that analyzing stocks is pointless since all information known is currently reflected in the current price. To put it simply:
The stock market sets the prices.
Analysts weigh known information about a company and thereby determine value.
The price does not have to equal the value. The efficient market theory is as the name implies, a theory. If it were law, prices would instantly adapt to information as it became available. Since it is a theory instead of law, this is not the case. Stock prices move above and below company values for both rational and irrational reasons.
Fundamental Analysis endeavors to ascertain the future value of a stock by means of analyzing current and/or past financial strength of a particular company. Analysts attempt to determine if the stock price is above or below value and what that means to the future of that stock. There are a multitude of factors used for this purpose. Basic terminology that helps the investor understand the analysts determination include:
“Value Stocks” are those that are below market value, and include the bargain stocks listed at 50 cents per dollar of value.
“Growth Stocks” are those with earnings growth as the primary consideration.
“Income Stocks” are investments providing a steady income source. This is primarily through dividends, but bonds are also common investment tools used to generate income.
“Momentum Stocks” are growth companies currently coming into the market picture. Their share prices are increasing rapidly.
To make sound fundamental decisions, all of the following factors must be considered. The previous terminology will be the underlying determining factor in how each will be used, based upon investor bias.
1. As usual, the earnings of a particular company are the main deciding factor. Company earnings are the profits after taxes and expenses. The stock and bond markets are mainly driven by two powerful dynamisms: earnings and interest rates. Harsh competition often accompanies the flow of money into these markets, moving into bonds when interest rates go up and into stocks when earnings go up. More than any other factor, a company’s earnings create value, although other admonitions must be considered with this idea.
2. EPS (Earnings Per Share) is defined as the amount of reported income, per share, that the company has on hand at any given time to pay dividends to common stockholders or to reinvest in itself. This indicator of a company’s condition is a very powerful way to forecast the future of a stock’s price. Earnings Per Share is arguably one of the most widely used fundamental ratios.
3. Fair price of a stock is also determined by the P/E (price/earnings) ratio. For example, if a particular company’s stock is trading at $60 and its EPS is $6 per share, it has a P/E of 10, meaning that investors can expect a 10% cash flow return.
Equation: $6/$60 = 1/10 = 1/(PE) = 0.10 = 10%
Along these same lines, if it’s making $3 a share, it has a multiple of 20. In this case, an investor may receive a 5% return, as long as current conditions remain the same in the future.
Example: $3/$60 = 1/20 = 1/(P/E) = 0.05 = 5%
Certain industries have different P/E ratios. For instance, banks have low P/E’s, normally in the range of 5 to 12. High tech companies have higher P/E ratios on the other hand, generally around 15 to 30. On the other hand, in the not too distance past, triple-digit P/E ratios for internet-stocks were seen. These were stocks with no earnings but high P/E ratios, defying market efficiency theories.
A low P/E is not a true indication of exact value. Price volatility, range, direction, and noteworthy news regarding the stock must be considered first. The investor must also consider why any given P/E is low. P/E is best used to compare industry-similar companies.
The Beardstown Ladies suggests that any P/E lower than 5 and/or above 35 be examined closely for errors, since the market average is between 5 and 20 historically.
Peter Lynch suggests a comparison of the P/E ratio with the company growth rate. Lynch considers the stock fairly priced only if they are about equal. If it is less than the growth rate, it could be a stock bargain. To put it into perspective, the basic belief is that a P/E ratio half the growth rate is very positive, and one that is twice the growth rate is very negative.
Other studies suggest that a stock’s P/E ration has little effect on the decision to buy or sell stock (William J. O’Neal, founder of the Investors Business Daily, in his studies of successful stock moves). He says the stock’s current earnings record and annual earnings increases, however, are vital.
It is necessary to mention that the value as represented by the P/E and/or Earnings per Share are useless to investors prior to stock purchase. Money is made after stock is bought, not before. Therefore, it is the future that will pay, both in dividends and growth. This means that investors need to pay as much attention to future earnings estimates as to the historical record.
4. Basic PSR (Price/Sales Ratio) is similar to P/E ratio, except that the stock price is divided by sales per share as opposed to earnings per share.
For many analysts, the PSR is a better value indicator than the P/E. This is because earnings often fluctuate wildly, while sales tend to follow more dependable trends.
PSR may be also be a more accurate measure of value because sales are more difficult to manipulate than earnings. The credibility of financial institutions have suffered through the Enron/Global Crossing/WorldCom, et al, debacle, and investors have learned how manipulation does go on within large financial institutions.
The PSR by itself is not very effective. It is effectively used only in conjunction with other measures. James O’Shaughnessy, in his book What Works on Wall Street, found that, when the PSR is used with a measure of relative strength, it becomes “the King of value factors.”
5. Debt Ratio shows the percentage of debt a company has as compared to shareholder equity. In other words, how much a company’s operation is being financed by debt.
Remember, under 30% is positive, over 50% is negative.
A successful operation with ascending profitability and a well marketed product can be destroyed by the company’s debt load, because the earnings are sacrificed to offset the debt.
6. ROE (Equity Returns) is found by dividing net income (after taxes) by the owner’s equity.
ROE is often considered to be the most important financial ration (for stockholders) and the best measure of a company’s management abilities. ROE gives stockholders the confidence they need to know that their money is well-managed.
ROE should always increase on a yearly basis.
7. Price/Book Value Ratio (a.k.a. Market/Book Ratio) compares the market price to the stock’s book value per share. This ratio relates what the investors believe a company (stock) is worth to what that company’s accountants say it is worth per recognized accounting principles. For example, a low ratio would suggest that the investors believe that the company’s assets have been overvalued based on its financial statements.
While investors would like the stocks to be trading at the same point as book value, in reality, most stocks trade either at a value above book value or at a discount.
Stocks trading at 1.5 to 2 times book value are about the limit when searching for value stocks. Growth stocks justify higher ratios, because they grant the anticipation of higher earnings. The ideal would be stocks below book value, at wholesale prices, but this rarely happens. Companies with low book value are often targets of a takeover, and are normally avoided by investors (at least until the takeover is complete and the process begins anew).
Book value was more important in a time when most industrial companies had actual hard assets, such as factories, to back up their stock. Sadly, the value of this measure has waned as companies with low capital have become commercial giants (i.e. Microsoft). Videlicet, look for low book value to keep the data in perspective.
8. Beta compares the volatility of the stock to that of the market. A beta of 1 proposes that a stock price moves up and down at the same rate as the market overall. A beta of 2 means that when the market drops the stock is likely to move double that amount. A beta of 0 means it does not move at all. A negative Beta means it moves in the opposite direction of the market, spelling a loss for the investor.
9. Capitalization is the total value of all of a company’s outstanding shares, and is calculated by multiplying the market price per share by the total number of outstanding shares.
10. Institutional Ownership refers to the percent of a company’s outstanding shares that are owned by institutions, mutual funds, insurance companies, etc., which move in and out of positions in very large blocks. Some institutional ownership can actually provide a measure of stability and make contributions to the roll with their buying and selling, respectively. Investors consider this an important factor because they can make use of the extensive research done by these institutions before making their own portfolio decisions. The importance of institutions in market action cannot be overstated, and accounts for over 70% of the dollar volume traded daily.
Market efficiency is a marketplace goal at all times. Anyone who puts money into a stock would like to see a return on their investment. Nevertheless, as before-mentioned, human emotions will always drive the market, causing over- and undervalue of common stocks. Investors must take advantage of patterns using modern computing tools to find the stocks most undervalued as well as develop the correct response to these market patterns, such as rolling within a channel (recognizing trends) with intelligence.
For those that wish to enter the stock market, it’s not that difficult. If you are intimidated by unfamiliar symbols, prices, and investing procedure, here are 10 rules you can follow for investing:
Know what stocks are. Know what company you are investing in. Follow the market – you can download a stock ticker straight to your computer, check quotes online, or look up historical stock prices. It’s good to do some research of the industry or company that you want to invest your money in.
Once you do the research, apply it. Pick companies whose industries are doing well. After you research your company and the stock market, be prepared to pick several companies that you want to put your money on.
3. Follow the market
This means follow the New York Stock Exchange (NYSE), follow the NASDAQ, and even stock markets from other countries. Stock prices can change within a day so its important your up to date on your industry or company that you want to invest in.
4. Stock goes down – Sell
Most people keep stocks that are going down because they think it will eventually go up again. Good idea? Wrong! If a stock goes down and your guy tells you the moneys gone, sell it before you lose more! I will say it again, sell bad stocks before you lose more!
5. Stock goes up – Don’t sell
Most people will sell with the idea being that they want to make a profit before the stock price goes back down. No, no, no! Stock prices go up for a reason and if it rises, then ride the wave to obtain maximum profits.
6. Unless you trade keep stocks for the long run
As I mentioned before, buying long term stocks that are well diversified will keep you in the positives. Stock traders make a living trading stock because they are trained. Unless you want to make a living off of price margins dealing with thousands of dollars, stick to buying good valued, long term stock that pay good dividends.
7. Common sense
Always use common sense. If you think you can become a millionaire overnight with the stock market, think again. It takes time, commitment, lots of ups and downs, but in the long run it will be profitable for you if you use your common sense. Pick good stocks and don’t take risks.
8. Analysts Recommendations
Follow analyst and their recommendations. If you want to invest in penny stocks, that’s another story. But buy stocks that have long term value, and following up on a recommendation is a good place to start. The stock market pays those who wait – i.e. if you bought Coke-a-Cola 50 years ago and kept the stock you would be a millionaire.
9. Be smart – Diversify
Number one rule of portfolio management: diversify. Make sure you don’t put all your eggs in one nest. Buy stocks in the financial industry, in the commodities industry, in utilities, gold, etc. Buy stock in Japan, in Germany, the United States, etc. Just make sure your pick of stocks are diversified and the risk is not held in one area.
10. Don’t be down if your stock fails
You are bound to lose some money with stocks. Everyone does. But don’t let it scare you away because there is so much potential. Average Americans don’t invest in the stock market because they fear losing money or don’t know how to use it. Take chances, and if you encounter several bumps along the road take them in stride and learn from your mistakes.
When it comes to the theory, online stock trading and making the best stock pick is easy to learn. Even beginners with no background in finance can do it. Learning how to trade online is easier nowadays, because of the many sites that offer trading services and applications that enable beginners like you to know how to trade stocks. Online stock firms are your best bets for learn the tools for making the best stock pick on the lot.
Online Brokerage Firm – Start by surfing for an online brokerage firm that offers start-up accounts that are easy to use and understand. There are many sites that offer turnkey applications and solutions for beginners like you to learn quickly about making the best stock pick. So choose one that you’re most comfortable with when you sign up. Many sites will also show the steps and ways for you to manage your stock and keep track of your stock investments. That way, not only are you learning something new, you’ll be able to guarantee your investments yourself, and make the bst stock pick you want.
These sites also offer online stock services to aid stock trading neophytes who want to make the best stock pick. Many online brokerage sites offer real-time stock quotes so you can stay informed of the current trends and shifts in the stock market. Other financial and market online news sites may also offer information about the stock market, and specifics stocks and options you may be looking to buy.
Getting Information – To be on the safe side, try searching for sites that offer the best ways for you to get firsthand information from the market. When making stock decisions and determining the best stock pick, key information about the trading is your edge to buying or selling stock. Asides from online stock trading sites, there are also sites that keep track of the various stock markets all over the world and provide information about the best stock pick, new stocks, and other developments, to professional stock traders, brokerage firms and non-professionals like yourself.
Stock pick developments, stock quote data, are just some of the information these sites can provide you with. These information may be delivered in delayed or real-time or real-time formats. Getting real-time stock information is a requirement if you’re interested in making the best stock pick. On the other hand, delayed stock quotes (that can be “delayed” from ten minutes to twenty-four hours) like after hours stock quote reports are often used for stock analysis and market projections.
These reports also include information on stock performance, as well as trading speculations and other news that may influence the value of your stock during the next trading day, week, or even month. You can also use these information in developing your own stock trading strategy, while earning the experience to make the best stock pick.
Why It’s Different – However, trading stocks online is not as instantaneous as it is on the floor. The lag time from the moment you make the best stock pick of your choice and elicit a buy offer for it, till that offered is closed, twelve or even twenty-four hours, may have elapsed. Thus, if the stock you’re interested moves rapidly, your best stock pick could be the worst on the floor. This is because, the Internet cannot duplicate the market hours.
Be sure to keep a pulse on what’s happening to your stock trading and investments so you can make the necessary adjustments. Keeping updated with the latest stock information is the best lesson to learn about online stock trading and making the best stock pick.
A stock picking software is capable of providing dynamic stock content. The robot named Marl possesses a database, which is constantly evolving and expanding in size, patterns and information.
Marl a stock picking robot gets very interested in some of the stocks, as he suddenly senses one not reacting to price changes around it. The price sits there as if stuck in a groove for several days. Marl recognizes those trading patterns as indicative of stocks on the verge of increasing. He goes to work analyzing the chart for patterns in the price changes, watching closely, he signals when to buy the stock at the existing price. Marl does the same job as stock fund managers in the stock exchanges around the world. Marl’s dynamic stock content just leads to better decisions and highly successful stock trades.
It takes a human between 8-10 seconds to study a stock chart containing stock content but Marl can analyze seven charts every second. Therefore, in 8-10 seconds a human analyzes one stock chart while Marl analyzes 56-70 stock charts in the same 8-10 seconds. Marl has within his robotic brain capable of exact stock picking. For $28,000, anyone can purchase a stock data content license and do his own bidding on the stock markets. The secret to success is the knowledge to analyze the stock market predictions found in the price and chart patterns gathered by the stock pick software.
Owners of a personal Stock Trading Robot, no longer have a stock guru because Michael does not come with the robot. The owner of a private robot patterned after Marl, lacks certainty in making choices even though he possesses dynamic stock content. He would no longer fell limited by perhaps by only two weekly stock picks.
True the private owner of a robot providing dynamic stock content is not limited to two stock purchases weekly and can use his personal clickbank everyday. However, private owners can loose, rather than double their stock value, the real purpose of a stock picking robot, when they lack the ability to interpret effectively the reports generated. These contain dynamic stock content, which if misinterpreted can be tragic in stock market trading.
The ability to translate information into money comes from disciplined behavior and prudent actions free of greed motivated, decisions. On October 30, 2007 at 8 o’clock in the morning, one of Michael’s stocks stood at 0.13. At 3:53 in the afternoon Marl recorded a sudden growth of 18.75%. The evening closed as the stocks value stood at $2437.50. The next day October 31, 2007 at 10 o’clock in the morning the stock opened at 0.265 increases the same day reached 113.85% yielding $2439.75. By the end of two days, the men made $5192.00
Although, the robot provides dynamic stock content, some private owners may not possess the knowledge to interpret the price and stock patterns successfully. The secret and the key for doubling stock trade using a stock pick database are comprehension, interpretation and sound decisions. Doubling your money is the result of possessing dynamic stock content, without which stock trading is less stable. Since earlier this year, present subscribers of the “Doubling Your Money Weekly Newsletter”, traders who took Michael’s advice, experienced weekly stock increases averaging 105.28%.