Saturday, April 26, 2008
Saturday, April 19, 2008
Patience and Concentrated Stock Portfolio
Buffett advocates that investors hold a "concentrated stock portfolio". At any time you should own a very small number of stocks, say six at most, and you should know everything there is to know about these stocks. In total, in a lifetime of investing, you should buy and sell no more than twenty times.
Buffett says: "An investor should act as though he had a lifetime decision card with just twenty punches on it. With every investment decision his card is punched, and he has one fewer available for the rest of his life." In a lifetime of investing this might result in, for example:
twenty stock purchases and no sales
Warren Buffett rightly extols the virtues of patience in investing - he says that he read annual reports from Anheuser-Busch Inc. for 25 years before buying their stock. He likens his patience in buying stocks to the patience of the baseball player who waits for the perfect pitch before swinging. We would caution beginning investors to bear in mind, however, that it takes a lot of practice before a baseball player consistently hits home runs from perfect pitches
Buffett says: "An investor should act as though he had a lifetime decision card with just twenty punches on it. With every investment decision his card is punched, and he has one fewer available for the rest of his life." In a lifetime of investing this might result in, for example:
twenty stock purchases and no sales
Warren Buffett rightly extols the virtues of patience in investing - he says that he read annual reports from Anheuser-Busch Inc. for 25 years before buying their stock. He likens his patience in buying stocks to the patience of the baseball player who waits for the perfect pitch before swinging. We would caution beginning investors to bear in mind, however, that it takes a lot of practice before a baseball player consistently hits home runs from perfect pitches
Buffett Investment Method
Warren Buffett works with a list of companies whose stock he would like to own. He compiles his list by studying companies and their management teams in considerable detail. His favorite type of stock is of a company with a uniquely competitive market position. Often the competitiveness arises from the strength of a brand name, such as Coca-Cola or Gillette. He buys a stock if and only if its share price drops below its long-term value (intrinsic value). He is prepared to wait years for an opportunity to buy stocks at the right price.
Buffett calculates the price he is willing to pay for a stock by estimating its future earnings. He then uses this estimate to predict what the stock will be worth in the future. In order to accomplish this with reasonable accuracy, he demands the company can demonstrate more-or-less consistent earnings growth for at least five years - preferably longer. Buffett buys stocks when their prices are at low enough levels to offer him a high probability of significantly outperforming returns offered by government bonds.
If stocks he likes don't reach his target price, Warren does not buy - no matter how much he may like the look of them. He says that paying too much for a stock is a good way to guarantee a poor return. If stocks he likes become available at or below his target price, he buys big. Then he waits. This is the "classic" and best-known Buffett investment method. (He has several.) After he has bought a stock, his preferred holding time is "forever," although he concedes that it is sensible to sell a stock if it becomes grossly overvalued. Over time, his stock buying decisions have been amply rewarded
Buffett calculates the price he is willing to pay for a stock by estimating its future earnings. He then uses this estimate to predict what the stock will be worth in the future. In order to accomplish this with reasonable accuracy, he demands the company can demonstrate more-or-less consistent earnings growth for at least five years - preferably longer. Buffett buys stocks when their prices are at low enough levels to offer him a high probability of significantly outperforming returns offered by government bonds.
If stocks he likes don't reach his target price, Warren does not buy - no matter how much he may like the look of them. He says that paying too much for a stock is a good way to guarantee a poor return. If stocks he likes become available at or below his target price, he buys big. Then he waits. This is the "classic" and best-known Buffett investment method. (He has several.) After he has bought a stock, his preferred holding time is "forever," although he concedes that it is sensible to sell a stock if it becomes grossly overvalued. Over time, his stock buying decisions have been amply rewarded
Who is He?
WARREN BUFFET was born on 30th august 1930 in Omaha, NEBRASKA. While in his senior year at the University of Nebraska, Buffet read Benjamin Graham’s book, The Intelligent Investor. This inspired Buffet that after finishing his degree he left to New York to study with Ben Graham at Columbia graduate business school. There Buffet understood the importance of numbers in investing. He returned back and after the call from graham once again he went back and joined Graham-Newman Company in 1954. In 1956, Graham Newman disbanded. He returned back to Omaha.
Fear and Greed
There is an old saying that the market is driven by fear and greed. Anyone that has placed more than a couple of trades will surely have experienced these two emotions.
All traders experience emotion. The distinction between a successful trader and an unsuccessful trader comes down to how they deal with that emotion. Let's look at how these emotions affect a successful trader and an unsuccessful trader in various scenarios:
1. The trader's three previous trades have been losers. The unsuccessful trader will consider this before placing his next trade and be fearful that this trade will also end up a loser. This might result in a delay in placing the trade whilst waiting for the price to confirm that they were right - thus missing a perfectly good entry. The successful trader will have tested their strategy extensively and will be aware that a series of losing trades is very probable. The fear is removed from the trade because they know that several losers in a row is to be expected.
2. Once a trade is entered it immediately moves against the trader. The unsuccessful trader will fear that they have made a mistake. The fear of taking another loss now controls their trading decisions, they might move their stop further out so the market doesn't take them out for a loss. The successful trader, of course, will know from extensive testing of his system that such trades happen and that the trade might come round or it might hit the stop. His stop is in place and it will remain in place - the system dictates where the stop is, not the trader's fears.
3. Once a trade is entered it immediately moves strongly in the traders favour. Greed has now completely taken over his trading decisions and the previous plan (if any) is ignored. The daytrade becomes a position trade
All traders experience emotion. The distinction between a successful trader and an unsuccessful trader comes down to how they deal with that emotion. Let's look at how these emotions affect a successful trader and an unsuccessful trader in various scenarios:
1. The trader's three previous trades have been losers. The unsuccessful trader will consider this before placing his next trade and be fearful that this trade will also end up a loser. This might result in a delay in placing the trade whilst waiting for the price to confirm that they were right - thus missing a perfectly good entry. The successful trader will have tested their strategy extensively and will be aware that a series of losing trades is very probable. The fear is removed from the trade because they know that several losers in a row is to be expected.
2. Once a trade is entered it immediately moves against the trader. The unsuccessful trader will fear that they have made a mistake. The fear of taking another loss now controls their trading decisions, they might move their stop further out so the market doesn't take them out for a loss. The successful trader, of course, will know from extensive testing of his system that such trades happen and that the trade might come round or it might hit the stop. His stop is in place and it will remain in place - the system dictates where the stop is, not the trader's fears.
3. Once a trade is entered it immediately moves strongly in the traders favour. Greed has now completely taken over his trading decisions and the previous plan (if any) is ignored. The daytrade becomes a position trade
Stock Market Psychology
In order to be a successful day trader, you need to have the right tools, choose the right markets, and trade the right trading systems. However, it is just as important to have the right psychological and emotional outlook. Without the right psychology, your emotions will have a big impact on your trading, and may even prevent you from trading at all.
Many investors suffer from the wrong psychological mindset for trading/investing. Your psychological mindset will play the most important factor to your success in the market. Understanding the importance of trading psychology and practicing correct trading discipline will ensure you are placed in the top percentile of all investors. You are increasing your chances of success.
Don't become emotionally attached to your trades - there is no point falling in love with your trades. The market does not love you, so you should not return the favour. When you become emotionally attached, you will start to make decisions with your emotions rather than with your head. Emotion in trading is dangerous. Don't become emotionally attached.
Most undisciplined investors would watch as the value of their investment shrinks before their eyes. It's never easy to watch hard earned money disappear! Human emotion can cloud the decision making process at this stage and will commonly hinder the performance of many investors. Emotion persuades the trader to hold onto the position in the hope that it will one day come good, after all, you always hear that stocks go up in the long term. The belief will always remain strong that the position will one day become a winner!
Many investors suffer from the wrong psychological mindset for trading/investing. Your psychological mindset will play the most important factor to your success in the market. Understanding the importance of trading psychology and practicing correct trading discipline will ensure you are placed in the top percentile of all investors. You are increasing your chances of success.
Don't become emotionally attached to your trades - there is no point falling in love with your trades. The market does not love you, so you should not return the favour. When you become emotionally attached, you will start to make decisions with your emotions rather than with your head. Emotion in trading is dangerous. Don't become emotionally attached.
Most undisciplined investors would watch as the value of their investment shrinks before their eyes. It's never easy to watch hard earned money disappear! Human emotion can cloud the decision making process at this stage and will commonly hinder the performance of many investors. Emotion persuades the trader to hold onto the position in the hope that it will one day come good, after all, you always hear that stocks go up in the long term. The belief will always remain strong that the position will one day become a winner!
Managing Risks
Just because an investment bears risk doesn’t mean that you need to spend sleepless nights
worrying about your financial future. Rather, you need to manage risk in a manner that brings you peace of mind. The first step in that process is determining how much risk you can live with—and stick with. Then look at what you can do to reduce your risk. Consider these factors:
Age.
The younger you are, the more risk you should be willing to take. Time is your ally. Because, over the long term, stocks have consistently outperformed any other kind of investment, younger investors can afford more exposure to stocks. They have more time to make up for short-term setbacks.
Other investments.
Look at your current mix before deciding what to do next. Having too much money in any one kind of investment can be dangerous. Diversifying your investments—creating a mix of stocks, bonds and cash investments—reduces risk. Knowledge. Do you follow the markets? Do you read The Wall Street Journal regularly? Or do you find the subject of investing confusing or boring? Obviously, the more that you understand, the more confident you are going to feel about investing. With confidence comes a higher comfort level for taking risks. It also increases the likelihood that you’ll make the right choices.
Attitude.
Some people might say that they are satisfied if their investments just keep pace with inflation. Others would gladly accept significant risk for the chance to reap big returns. Where do you fall within the spectrum? Once you understand your tolerance for risk and the ways to reduce risk, you’ll want to evaluate your investment choices. You should do so by carefully balancing each investment’s potential risk and reward. Study your choices and make a decision on your own, or consult someone you trust for advice. Don’t act hastily or follow the pack just because you don’t know what to do
worrying about your financial future. Rather, you need to manage risk in a manner that brings you peace of mind. The first step in that process is determining how much risk you can live with—and stick with. Then look at what you can do to reduce your risk. Consider these factors:
Age.
The younger you are, the more risk you should be willing to take. Time is your ally. Because, over the long term, stocks have consistently outperformed any other kind of investment, younger investors can afford more exposure to stocks. They have more time to make up for short-term setbacks.
Other investments.
Look at your current mix before deciding what to do next. Having too much money in any one kind of investment can be dangerous. Diversifying your investments—creating a mix of stocks, bonds and cash investments—reduces risk. Knowledge. Do you follow the markets? Do you read The Wall Street Journal regularly? Or do you find the subject of investing confusing or boring? Obviously, the more that you understand, the more confident you are going to feel about investing. With confidence comes a higher comfort level for taking risks. It also increases the likelihood that you’ll make the right choices.
Attitude.
Some people might say that they are satisfied if their investments just keep pace with inflation. Others would gladly accept significant risk for the chance to reap big returns. Where do you fall within the spectrum? Once you understand your tolerance for risk and the ways to reduce risk, you’ll want to evaluate your investment choices. You should do so by carefully balancing each investment’s potential risk and reward. Study your choices and make a decision on your own, or consult someone you trust for advice. Don’t act hastily or follow the pack just because you don’t know what to do
What Risks?
Still stock trading involves numerous risks if the investor is not careful. Stock trading remains imbued with several risks all the time.
Every investment in the stock of an individual company comes with these risks:
Market Risk
This is the risk of investing in the stock market in general. The stock market as a whole will rise and fall over time based upon investors' collective view of how desireable it is to own an investment in stock. Your company may be doing poorly, but the value of the stock is going up because the stock market in general is going up. Conversely, your company may be doing very well, but the value of the stock drops because of inflation, rising interest rates or some other factor which is causing investors to prefer another type of investment. All stocks are affected by market risk. The history of the financial markets suggests that investments in stocks are most likely to beat inflation over time. That’s one reason that so much new investment has been pouring into equity mutual funds in recent years. Yet, if there is one thing that the market reverses of the recent past have taught us, it is this: Investors can’t take stocks for granted.
Industry Risk
This is risk that affects all companies in a certain industry. Utility companies, for example, are often viewed as relatively low in risk because the utility industry is a mature industry operating in a predicatable environment with relatively little change. In contrast, internet and other technology industries are usually viewed as high in risk because the industry is changing so quickly and unpredictably. All stocks within an industry are subject to industry risk.
Regulatory Risk
Virtually every company is subject to some sort of regulation. Regulatory risk is the risk that the government will pass new laws or implement new regulations which will dramatically affect a business.
Business Risk
Refers to the risks unique to an individual company. Products, strategies, management, labor force, market share, etc., are among the key factors investors consider in evaluating the value of a specific company.
With good money management, you`ll be able to limit your risk. But, there is a kind of risk that can`t be minimized, and that`s "market risk”. This is the risk that the market might not be there tomorrow. Just by putting money in the market you are putting it at risk, so make sure you only trade with money you are willing to lose. This isn`t to say that you are going to lose all your capital - it`s just to say that you need to be able to focus on trading well, not trading to make money. See, you can only do this if you work with money you can afford to lose.
Every investment in the stock of an individual company comes with these risks:
Market Risk
This is the risk of investing in the stock market in general. The stock market as a whole will rise and fall over time based upon investors' collective view of how desireable it is to own an investment in stock. Your company may be doing poorly, but the value of the stock is going up because the stock market in general is going up. Conversely, your company may be doing very well, but the value of the stock drops because of inflation, rising interest rates or some other factor which is causing investors to prefer another type of investment. All stocks are affected by market risk. The history of the financial markets suggests that investments in stocks are most likely to beat inflation over time. That’s one reason that so much new investment has been pouring into equity mutual funds in recent years. Yet, if there is one thing that the market reverses of the recent past have taught us, it is this: Investors can’t take stocks for granted.
Industry Risk
This is risk that affects all companies in a certain industry. Utility companies, for example, are often viewed as relatively low in risk because the utility industry is a mature industry operating in a predicatable environment with relatively little change. In contrast, internet and other technology industries are usually viewed as high in risk because the industry is changing so quickly and unpredictably. All stocks within an industry are subject to industry risk.
Regulatory Risk
Virtually every company is subject to some sort of regulation. Regulatory risk is the risk that the government will pass new laws or implement new regulations which will dramatically affect a business.
Business Risk
Refers to the risks unique to an individual company. Products, strategies, management, labor force, market share, etc., are among the key factors investors consider in evaluating the value of a specific company.
With good money management, you`ll be able to limit your risk. But, there is a kind of risk that can`t be minimized, and that`s "market risk”. This is the risk that the market might not be there tomorrow. Just by putting money in the market you are putting it at risk, so make sure you only trade with money you are willing to lose. This isn`t to say that you are going to lose all your capital - it`s just to say that you need to be able to focus on trading well, not trading to make money. See, you can only do this if you work with money you can afford to lose.
Drawing Trendlines
Trendlines show support boundaries under prices. Temporary trendline penetrations are not as significant as a close beyond the trendline. Prices retrace a portion of the current trend before resuming in the original direction. These counter trend moves tend to retrace to certain predictable percentages. When prices trend between two parallel trendlines, they form a Channel. When prices hit the bottom trendline, this may be used as a buying area, and when prices hit the upper trendline, this may be used as a selling area.
The noun “chartist” and related verb “charting” are also used, sometimes referring to a subset of technical anaysis. Also, technical analysts are often referred to as “noise traders” in the academic literature (noise being anything other than news). Technical analysis is research of market dynamics that is done mainly with the help of charts and with the purpose of forecasting future price development. Technical analysis comprises several approaches to the study of price movement which are interconnected in the framework of one harmonious theory. This type of analysis studies the price movement on the market by means of analyzing three market factors: price, volumes, and, in case of study of futures contracts’ market, of an open interest (number of open positions). Of these three factors the primary one for technical analysis is the prices, while the alterations in other factors are studies mainly in order to confirm the correctness of the identified price trend. This technical theory, just like any theory, has its core postulates.
The noun “chartist” and related verb “charting” are also used, sometimes referring to a subset of technical anaysis. Also, technical analysts are often referred to as “noise traders” in the academic literature (noise being anything other than news). Technical analysis is research of market dynamics that is done mainly with the help of charts and with the purpose of forecasting future price development. Technical analysis comprises several approaches to the study of price movement which are interconnected in the framework of one harmonious theory. This type of analysis studies the price movement on the market by means of analyzing three market factors: price, volumes, and, in case of study of futures contracts’ market, of an open interest (number of open positions). Of these three factors the primary one for technical analysis is the prices, while the alterations in other factors are studies mainly in order to confirm the correctness of the identified price trend. This technical theory, just like any theory, has its core postulates.
Analysis And Timing
Markets don't move straight up and down. The direction of any market at any time is either Bullish (Up), Bearish (Down), or Neutral (Sideways). Within those trends, markets have countertrend (backing & filling) movements. In a general sense, "Markets move in waves," and in order to make money, a trader must catch the wave at the right time.
Technical analysts base their research on the following three axioms:
Market movement considers everything
This is the most important postulate of technical analysis. It is crucial to understand it in order to grasp rightly the procedures of analysis. The gist of it is that any factor that influences the price of securities, whether economic, political, or psychological, has already been taken into account and reflected in the price chart. In other words, every price change is accompanied by a change in external factors. By means of analyzing price charts and multiple other indicators, a technical analyst comes to the point that the market itself shows to her/him the trend it will most likely follow.
This premise is in conflict with fundamental analysis where the attention is primarily paid to the study of factors, and later on, after the analysis of the factors, to conclusions as to the market trends are made. Thus, if the demand is higher than the supply, a fundamental analyst will come to the conclusion that the price will grow. Technical analyst, however, makes her/his conclusions in the opposite sequence: since the price has grown, it means the demand is higher than the supply.
The prices move with the trend
This assumption is the basis for all methods of technical analysis, as a market that moves in accordance with trends can be analyzed, unlike a chaotic market. The postulate that the price movement is a result of a trend has two effects. The first one implies that the current trend will most likely continue and will not reverse itself, thus, excluding disorderly chaotic movement of the market. The history repeats itself
Technical analysts base their research on the following three axioms:
Market movement considers everything
This is the most important postulate of technical analysis. It is crucial to understand it in order to grasp rightly the procedures of analysis. The gist of it is that any factor that influences the price of securities, whether economic, political, or psychological, has already been taken into account and reflected in the price chart. In other words, every price change is accompanied by a change in external factors. By means of analyzing price charts and multiple other indicators, a technical analyst comes to the point that the market itself shows to her/him the trend it will most likely follow.
This premise is in conflict with fundamental analysis where the attention is primarily paid to the study of factors, and later on, after the analysis of the factors, to conclusions as to the market trends are made. Thus, if the demand is higher than the supply, a fundamental analyst will come to the conclusion that the price will grow. Technical analyst, however, makes her/his conclusions in the opposite sequence: since the price has grown, it means the demand is higher than the supply.
The prices move with the trend
This assumption is the basis for all methods of technical analysis, as a market that moves in accordance with trends can be analyzed, unlike a chaotic market. The postulate that the price movement is a result of a trend has two effects. The first one implies that the current trend will most likely continue and will not reverse itself, thus, excluding disorderly chaotic movement of the market. The history repeats itself
Basic Technical Analyst
TREND
Trend is simply, the overall direction prices are moving, UP, DOWN, OR FLAT. Without a current trend, prices will stay relatively the same, and without changes in price, trading will not be profitable.
Up trend: As the trend moves upward, the U.S. dollar is appreciating in value.
Down trend: As the trend moves downward, the U.S. dollar is depreciating in value.
Sideways trend: Prices are moving within a narrow range.
The basic trendline is one of the simplest technical tools employed by the trader, and is also one of the most valuable in any type of technical trading. A price low is the lowest price reached during a counter trend move.
DRAWING BULLISH TREND LINES:
After prices hit the trendline for the 3rd time, the trader should be confident that the trend is established.
PRICE ACCELERATION:
As prices accelerate upward, a 2nd or 3rd trendline may be drawn to follow the price trend.
Up trend: As the trend moves upward, the U.S. dollar is appreciating in value.
Down trend: As the trend moves downward, the U.S. dollar is depreciating in value.
Sideways trend: Prices are moving within a narrow range.
The basic trendline is one of the simplest technical tools employed by the trader, and is also one of the most valuable in any type of technical trading. A price low is the lowest price reached during a counter trend move.
DRAWING BULLISH TREND LINES:
After prices hit the trendline for the 3rd time, the trader should be confident that the trend is established.
PRICE ACCELERATION:
As prices accelerate upward, a 2nd or 3rd trendline may be drawn to follow the price trend.
What is Technical Analysis?
Technical analysis attempts to use past stock price and volume information to predict future price movements. Note the emphasis. It also attempts to time the markets.
Technical analysis is the process of analyzing a security's historical prices in an effort to determine probable future prices. This is done by comparing current price action (i.e., current expectations) with comparable historical price action to predict a reasonable outcome. Should I know anything about technical analysis?
Technical analysis is the process of analyzing a security's historical prices in an effort to determine probable future prices. This is done by comparing current price action (i.e., current expectations) with comparable historical price action to predict a reasonable outcome. Should I know anything about technical analysis?
Fundamental Analysis Tools
Each article discusses related ratios. Fundamental analysis is a method used to determine the value of a stock by analyzing the financial data that is 'fundamental' to the company. That means that fundamental analysis takes into consideration only those variables that are directly related to the company itself, such as its earnings, its dividends, and its sales.
Earnings
It is often said that earnings are the "bottom line" when it comes to valuing a company's stock, and indeed fundamental analysis places much emphasis upon a company's earnings. Simply put, earnings are how much profit (or loss) a company has made after subtracting expenses. During a specific period of time, all public companies are required to report their earnings on a quarterly basis through a 10-Q Report . Earnings are important to investors because they give an indication of the company's expected dividends and its potential for growth and capital appreciation.
Earnings Per Share
Comparing total net earnings for various companies is usually not a good idea, since net earnings numbers don't take into account how many shares of stock are outstanding (in other words, they don't take into account how many owners you have to divide the earnings among). In order to make earnings comparisons more useful across companies, fundamental analysts instead look at a company's earnings per share (EPS).
EPS is calculated by taking a company's net earnings and dividing by the number of outstanding shares of stock the company has. For example, if a company reports $10 million in net earnings for the previous year and has 5 million shares of stock outstanding, then that company has an EPS of $2 per share. EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS").
P/E Ratio
EPS is a great way to compare earnings across companies, but it doesn't tell you anything about how the market values the stock. That's why fundamental analysts use the price-to-earnings ratio, more commonly known as the P/E ratio, to figure out how much the market is willing to pay for a company's earnings. You can calculate a stock's P/E ratio by taking its price per share and dividing by its EPS. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all. For those companies you may want to calculate the price-to-sales ratio (PSR) instead .
PEG
So is a stock with a high P/E ratio always overvalued? The stock could have a high P/E ratio because investors are convinced that it will have strong earnings growth in the future and so they bid up the stock's price now. Fortunately, there is another ratio that you can use that takes into consideration a stock's projected earnings growth: it's called the PEG. PEG is calculated by taking a stock's P/E ratio and dividing by its expected percentage earnings growth for the next year.
Dividend Yield
The dividend yield measures what percentage return a company pays out to its shareholders in the form of dividends . Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don't have a dividend yield at all because they don't pay out dividends.
Dividend Payout Ratio
The dividend payout ratio shows what percentage of a company's earnings it is paying out to investors in the form of dividends. It is calculated by taking the company's annual dividends per share and dividing by its annual earnings per share (EPS). So, if a company pays out $1 per share annually in dividends and it has an EPS of $2 for the year, then that company has a dividend payout ratio of 50%; in other words, the company paid out 50% of its earnings in dividends. Companies that distribute dividends typically use about 25% to 50% of their earnings for dividend payments.
Book Value
The book value of a company is the company's net worth, as measured by its total assets minus its total liabilities. values across companies, you should use book value per share, which is simply the company's last quarterly book value divided by the number of shares of stock it has outstanding.
Price / Book
A company's price-to-book ratio (P/B ratio) is determined by taking the company's per share stock price and dividing by the company's book value per share. For instance, if a company currently trades at $100 and has a book value per share of $5, then that company has a P/B ratio of 20. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. Price-to-book ratio is of more interest to value investors than growth investors.
Price / Sales Ratio
As with earnings and book value, you can find out how much the market is valuing a company by comparing the company's price to its annual sales. You can calculate the P/S by taking the stock's current price and dividing by the company's total sales per share for the past year (or equivalently, by dividing the entire company's market cap by its total sales). Because of the limitations, P/S ratios are usually used only for unprofitable companies, since such companies don't have a P/E ratio .
Return on equity (ROE) shows you how much profit a company generates in comparison to its book value. The ratio is calculated by taking a company's after-tax income (after preferred stock dividends but before common stock dividends) and dividing by its book value (which is equal to its assets minus its liabilities). Investors usually look for companies with ROEs that are high and growing
Earnings
It is often said that earnings are the "bottom line" when it comes to valuing a company's stock, and indeed fundamental analysis places much emphasis upon a company's earnings. Simply put, earnings are how much profit (or loss) a company has made after subtracting expenses. During a specific period of time, all public companies are required to report their earnings on a quarterly basis through a 10-Q Report . Earnings are important to investors because they give an indication of the company's expected dividends and its potential for growth and capital appreciation.
Earnings Per Share
Comparing total net earnings for various companies is usually not a good idea, since net earnings numbers don't take into account how many shares of stock are outstanding (in other words, they don't take into account how many owners you have to divide the earnings among). In order to make earnings comparisons more useful across companies, fundamental analysts instead look at a company's earnings per share (EPS).
EPS is calculated by taking a company's net earnings and dividing by the number of outstanding shares of stock the company has. For example, if a company reports $10 million in net earnings for the previous year and has 5 million shares of stock outstanding, then that company has an EPS of $2 per share. EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS").
P/E Ratio
EPS is a great way to compare earnings across companies, but it doesn't tell you anything about how the market values the stock. That's why fundamental analysts use the price-to-earnings ratio, more commonly known as the P/E ratio, to figure out how much the market is willing to pay for a company's earnings. You can calculate a stock's P/E ratio by taking its price per share and dividing by its EPS. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all. For those companies you may want to calculate the price-to-sales ratio (PSR) instead .
PEG
So is a stock with a high P/E ratio always overvalued? The stock could have a high P/E ratio because investors are convinced that it will have strong earnings growth in the future and so they bid up the stock's price now. Fortunately, there is another ratio that you can use that takes into consideration a stock's projected earnings growth: it's called the PEG. PEG is calculated by taking a stock's P/E ratio and dividing by its expected percentage earnings growth for the next year.
Dividend Yield
The dividend yield measures what percentage return a company pays out to its shareholders in the form of dividends . Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don't have a dividend yield at all because they don't pay out dividends.
Dividend Payout Ratio
The dividend payout ratio shows what percentage of a company's earnings it is paying out to investors in the form of dividends. It is calculated by taking the company's annual dividends per share and dividing by its annual earnings per share (EPS). So, if a company pays out $1 per share annually in dividends and it has an EPS of $2 for the year, then that company has a dividend payout ratio of 50%; in other words, the company paid out 50% of its earnings in dividends. Companies that distribute dividends typically use about 25% to 50% of their earnings for dividend payments.
Book Value
The book value of a company is the company's net worth, as measured by its total assets minus its total liabilities. values across companies, you should use book value per share, which is simply the company's last quarterly book value divided by the number of shares of stock it has outstanding.
Price / Book
A company's price-to-book ratio (P/B ratio) is determined by taking the company's per share stock price and dividing by the company's book value per share. For instance, if a company currently trades at $100 and has a book value per share of $5, then that company has a P/B ratio of 20. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. Price-to-book ratio is of more interest to value investors than growth investors.
Price / Sales Ratio
As with earnings and book value, you can find out how much the market is valuing a company by comparing the company's price to its annual sales. You can calculate the P/S by taking the stock's current price and dividing by the company's total sales per share for the past year (or equivalently, by dividing the entire company's market cap by its total sales). Because of the limitations, P/S ratios are usually used only for unprofitable companies, since such companies don't have a P/E ratio .
Return on equity (ROE) shows you how much profit a company generates in comparison to its book value. The ratio is calculated by taking a company's after-tax income (after preferred stock dividends but before common stock dividends) and dividing by its book value (which is equal to its assets minus its liabilities). Investors usually look for companies with ROEs that are high and growing
Fundamental Analysis
Many investors use fundamental analysis alone or in combination with other tools to evaluate stocks for investment purposes. The goal is to determine the current worth and, more importantly, how the market values the stock. If we were all totally logical and could separate our emotions from our investment decisions, then, fundamental analysis the determination of price based on future earnings, would work magnificently. And since we would all have the same completely logical expectations, prices would only change when quarterly reports or relevant news was released. Investors would seek "overlooked" fundamental data in an effort to find undervalued securities.
Evaluate
The most basic of these is to ensure you oversee your trading capital. Why? The most important aim in trading is to preserve your capital. Further, monitoring your performance allows you to review your past trades and learn from your mistakes. How will you go about conducting a review of your trading activities and how often will you do this?
Write It Down !
First, you should have a diary trading plan
You have to write down all your trading plan and it should detail all of your trading decisions, including reasons for initiating a trade, notes concerning the short and medium term trends of the price and relevant economic sector, as well as daily adjustments of exits. A trading diary provides you with a methodical way of maintaining a clear focus. The most basic of these is to ensure you oversee your trading capital. Further, monitoring your performance allows you to review your past trades and learn from your mistakes. How will you go about conducting a review of your trading activities and how often will you do this?
Money management
There is a lot to learn about managing your money in trading.
The most important trading rule is to cut your losses. Determined the maximum percentage of your trading capital you are prepared to commit to cut losees.
What happens if you keep losing money? This question has little to do with trading but rather your own financial situation. Your decision to enter a trade is one of the first decisions you make when trading.
Method
Conceptualise your trading methodology. Are you going to trade more fundamental or speculative stocks? Are you going to trade in only the top 50 stocks from your exchange and look at medium term trends only with a focus in industrial sector stocks?. Are you interested in reversals of short term or medium term trends? Will you trade multiple products? Should you be trading anything other than stocks if you be starting out?
Market analysis
Will you use any form of sector analysis in your method? Will it be the starting point for your trade selection process or will it be a final filter to ensure you don’t enter stocks that belong to poorly performing sectors?
You have to write down all your trading plan and it should detail all of your trading decisions, including reasons for initiating a trade, notes concerning the short and medium term trends of the price and relevant economic sector, as well as daily adjustments of exits. A trading diary provides you with a methodical way of maintaining a clear focus. The most basic of these is to ensure you oversee your trading capital. Further, monitoring your performance allows you to review your past trades and learn from your mistakes. How will you go about conducting a review of your trading activities and how often will you do this?
Money management
There is a lot to learn about managing your money in trading.
The most important trading rule is to cut your losses. Determined the maximum percentage of your trading capital you are prepared to commit to cut losees.
What happens if you keep losing money? This question has little to do with trading but rather your own financial situation. Your decision to enter a trade is one of the first decisions you make when trading.
Method
Conceptualise your trading methodology. Are you going to trade more fundamental or speculative stocks? Are you going to trade in only the top 50 stocks from your exchange and look at medium term trends only with a focus in industrial sector stocks?. Are you interested in reversals of short term or medium term trends? Will you trade multiple products? Should you be trading anything other than stocks if you be starting out?
Market analysis
Will you use any form of sector analysis in your method? Will it be the starting point for your trade selection process or will it be a final filter to ensure you don’t enter stocks that belong to poorly performing sectors?
Why you should make a trading plan?
The simple answer is that a trading plan will increase your chances of trading successfully in the long-term. A well-constructed trading plan will give you a process to select shares, clear guidelines on when to enter and exit the market and how much to invest in each particular trade. And most importantly it will help you take the emotion out of trading so that you make better decisions. Another advantage of a plan is that it forces you to be accountable. Each component of the plan should be signed off and tested which will help you to trade consistently.
You Need Money to Trade
In addition to your goals for trading, you also should be well aware of the resources you bring to the trading table. They will play a big part in the stock market you can trade and in the way you trade them.
Here are some resources you have to consider as you ponder what and how to trade:
Money
In stockmarket you have to have money to make money. You also do not want to have the pressure of having the funds for trading come from money you need to pay the rent or buy groceries or from funding the account with your credit card. Your trading money should come from discretionary funds that you can afford to lose without affecting your lifestyle.
Having money to invest is just not enough. You should not seriously consider investing unless you had satisfied at least one of the three following conditions:
You have six months income worth in savings.
Your current assets equal to your current liabilities.
You have just acquired a sudden windfall or inheritance, which should be thought as capital and not as current income.
If you think you`re ready to start trading, look carefully at where you`re getting your money from. Maybe you`ve been considering trading for a while and built up some savings. That`s good planning. Or maybe you`re considering borrowing money. This is generally a bad idea. Maxing out your credit cards is a quick and easy way to get cash, but the effects can be devastating. Any investor, who does not diversify his investments and puts all his eggs in one basket, especially when he invests all his money in equities, is likely to bear the brunt when the market falls. Short-term investors who take loans to invest in equities suffer most. Trading and investing in securities is always risky. For that reason, you should trade or invest only "risk capital" -- money you can afford to lose. While this is an individual matter, we recommend that you risk no more than 10% of your liquid net worth -- and, in some cases, you should risk less than that. For example, if 10% of your liquid net worth represents your entire retirement savings, you should not use that amount to buy and sell securities. Trading in stock market involves HIGH RISK and YOU can LOSE a lot of money.
Greedy stock traders risking ALL their money in stock market, but smart stock investors invest within their surplus in savings. It is just a common sense, but you will be amazed on how investors around you get greedy when stock market appear to be very bullish.
How Stocks Work?
Before you learn how to start trading stock you must to understand how stocks work? Basically, stock market is an avenue for the company to finance their businesses, other than bank loan. The fund proceed can be used to finance the company’s expansion, repay loan, etc. For shareholders, they get the opportunity to participate in capital intensive businesses at an affordable price.
Where can we buy stocks?
Primary Offering
The primary market is for the sale of fresh shares newly created by a company through the Initial Public Offering (IPO) in stock market. If successful, it will start selling its common shares to public investors through an Initial Public Offering (IPO).
Secondary market
Since, the company get listed in the stock exchange, this is the time where other investors or stock traders start buying and selling stocks. You’ll find its share price start moving. Company’s profitability, economics evaluation and market condition are some of the factors will affect the demand and supply and made the price fluctuation on the stockmarket
Stock Exchange at glance
We must look at the concept of the stock exchange. The stock market is in existence to enable buyers and seller to interact, a stock exchange is simply somewhere people can go to buy and sell shares.
Types of Stock Exchange
These are the physical exchange where there is a trading floor such as the New York Stock Exchange. The best example of this system is of course the New York Stock Exchange. The people you see waving their arms and talking on the phone are floor brokers who represent a brokerage elsewhere.
The virtual stock exchange where buying and selling of stocks is done on computers.
The virtual exchange as I have said before is an exchange where to trade takes place on computers and this is how most people start of when learning how to trade stocks. Before you learn how to start trading stock you must to understand how stocks work?
Where can we buy stocks?
Primary Offering
The primary market is for the sale of fresh shares newly created by a company through the Initial Public Offering (IPO) in stock market. If successful, it will start selling its common shares to public investors through an Initial Public Offering (IPO).
Secondary market
Since, the company get listed in the stock exchange, this is the time where other investors or stock traders start buying and selling stocks. You’ll find its share price start moving. Company’s profitability, economics evaluation and market condition are some of the factors will affect the demand and supply and made the price fluctuation on the stockmarket
Stock Exchange at glance
We must look at the concept of the stock exchange. The stock market is in existence to enable buyers and seller to interact, a stock exchange is simply somewhere people can go to buy and sell shares.
Types of Stock Exchange
These are the physical exchange where there is a trading floor such as the New York Stock Exchange. The best example of this system is of course the New York Stock Exchange. The people you see waving their arms and talking on the phone are floor brokers who represent a brokerage elsewhere.
The virtual stock exchange where buying and selling of stocks is done on computers.
The virtual exchange as I have said before is an exchange where to trade takes place on computers and this is how most people start of when learning how to trade stocks. Before you learn how to start trading stock you must to understand how stocks work?
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