3. A Beginner’s Guide to Stock 2

what is stock

How will choose which shares to trade?

Choosing which stocks to trade will depend on a number of factors such as your trading plan, how much capital you have, your level of experience as well as the analysis you put in place. However, fundamental and technical analyses are the main methodologies that will help you when trading in the financial markets. Basically, the fundamental analytics will look at the fundamental factors to help them to know whether the current share markets prices will overvalue or undervalue the market. Financially, the fundamental analysis tries to measure the intrinsic value of the company by use of the company’s cash flow statement, balance sheet, and income statement.

A trader can analyze the fundamentals of a company In the same way a person can go about buying a property. You will do this by looking at the basic things such as the foundations, crime rate, and potential growth rate. Basically, the fundamental analysis will look at the following things;

Balance sheet- This is the summary of the firm’s assets, owner’s equity and liabilities.

Management team- These are the people who administer a firm, create policies and provide the necessary support in order to implement the business objectives of the owner. 

Earnings – This is the net income of the firm during a certain period. Usually it is divided into 4 quarters

Acquisitions/Mergers- This is the Acquisition in which all the liabilities and assets are absorbed by the buyer

Market share/market penetration- This refers to the percentage of trading volume in a stock that a specific market makes and trade. It is usually used in context of general equities

Revenue Outlook/ market outlook- Also referred as revenue forecasting. It is done by calculating the amount the firm will get after making sales during a specific period. 

P/E Ratio- This is the current stock price divided by the annual earnings per share. 

What is the technical analysis?

The technical analysis will focus on the trends, support levels as well as the resistance levels

The Trends- this is the general direction of the market is it up, sideways or downwards.

Support levels – Can be defined as the price level where past buyers have emerged and given certain results. This will help the trader to decide the right moment to buy or sell the shares. In general, a market stops falling when there is more demand than supply. This can be easily identified using technical basis as you can just check where the stock has bottomed out in the past.

Resistance levels- This is the price level where it is hard for a market to rise above. It is determined by looking at the past records that shows that some sellers emerged and pushed the prices at a lower level. Using the technical analysis, you can note the ceiling that emerges after persistent selling a security or a commodity.

Moving Average- This is the average stock price over a specified period. The period can be as long as several days or short as a few days.

52- Week high/ low range- This can be defined as the lowest and highest prices that the stock had traded in the year before. Traders view the 52- week high or low range as a very important factor that determines the current value well as in predicting the future movement of the price.

What is the difference between the fundamental and technical analysis

Most traders are confused when deciding which the best analysis to use between the two. Although some traders consider the approaches to be opposite of each other, some traders argue that the two can co-exist. This means that a trader can use both strategies when considering their next action to take. Just as most things, there are pros and cons of using each of the approaches. However, the most important thing here is to find a way that works best for you. Apply your instincts and research your own strategy. In the mean time, we will list the main differences between the two strategies to help you in deciding which approach is best for you.

Time frame

Technical analysis will take a short-term approach to analyzing the market. It can be used in a time frame of weeks, days or even hours. It is commonly used by day traders with an aim of selecting assets that can be sold to other traders at a higher price in the short term.

On the other hand, the fundamental approach is long-term approach strategy. The approach looks at the data of a number of years. Long-term investors whose main aim is to select stocks that increase in value over time commonly use it. 

Sources

Technical analysis uses data from analyzing charts, and looking at the trend, resistance level, support and price pattern.

The fundamental analyst will look at the data fro news events, economic reports, and industrial statistics. The analysts compare the current news events with the reported expectations, historical events against actual outcomes.

Geopolitical aspects

Politics of a certain region is a major factor affecting stocks and shares. In fact, the market is greatly affected by any type of geopolitical events. For instance, when the oil price went down in 2014, it affected the profits and the general market value of major global companies around the world.

Top down vs. the bottom up

A top down investor looks at the big picture. Investors who use this approach will look at the general economy and predict which company is likely to have the greatest return and value growth. For instance, you can use this approach to help you in deciding what sector or company is going to benefit from the economic factors. A very good example of this has been the mobile tech and chipmakers companies. Individuals who invested in these companies have made enormous profits over the past decade.

A bottom-up investor will over look the economic condition and look for strong companies that have good prospects without considering the macroeconomic factors. These investors use the fundamental analysis to evaluate the company. This approach does not limit a trader to just looking at the markets but also take political aspects into consideration. In our opinion, a, if you are an individual investor top-down approach, is a more logical approach.

We hope that this information will help you to start stock trading without problems. You can get more information about this by visiting eToro Index website or contact them today.

 

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