Understanding Stocks 2E by Michael Sincere

Author:Michael Sincere
Language: eng
Format: epub
Publisher: McGraw Hill LLC

And now, you will enter the most challenging part of the book: learning about fundamental and technical analysis. Learning how to use these tools will help you determine when to buy a stock and, just as important, when to sell.

PART FOUR

DECIDE WHICH STOCKS TO BUY OR SELL

11

It’s Really Fundamental: How to Analyze Companies

Now that you have been introduced to some money-making strategies, you probably want to know which stocks to pick, and how to evaluate them so you can make better investments. This is the chapter that will help you choose and evaluate stocks using fundamental analysis. Other chapters in this section show you how to use technical analysis to evaluate stocks.

Let’s pretend that you are a doctor dealing with a new patient who has come to see you for a checkup. You might begin by asking questions, have the patient fill out a questionnaire, ask about his or her medical history, and ask whether anyone in the family has any medical problems. You will probably have a checklist. If you relate this preparation to the stock market, this is fundamental analysis.

You might also take an Electrocardiogram (EKG) of the patient. By looking at the EKG, you can identify potential problems or clear the patient. Looking at the patient’s EKG is similar to looking at a chart on the stock market. This is called technical analysis.

I’ll be honest with you: For some of you, these concepts will be difficult to grasp, but they’re also among the most important for stock trading. After all, if you jump into the market with a fistful of stock ideas without knowing if the stocks are a good value, you could lose money.

Also, by using fundamental or technical analysis, you can find your own stocks or evaluate stocks you heard about rather than relying on tips from someone on TV or acquaintances. Learning how to evaluate stocks is a time-consuming skill you should learn.

As you’ll discover, fundamental and technical analysis are more art than science. Although everyone is looking at the same data, the hard part is interpreting the data to generate useful conclusions. Here’s something else you should know: Even when you are using some of the best software and hardware, there is no guarantee you will make money.

You really have two choices: You can research the company, its earnings, and balance sheet. That’s fundamental analysis. Or you can study price and volume and look at market indicators on charts. That’s technical analysis. (A third choice is to let others do it for you.)

In my opinion, you should use both methods because each has strengths as well as weaknesses. By using both fundamental and technical analysis, you will become a much better and more knowledgeable investor.

And now, let’s get started learning about fundamental analysis.

Understanding Fundamental Analysis

The most common question that beginners ask is: How do you find stocks to buy? It’s a very good question. If you go long by buying shares of stock in a company, you expect the stock price to go up.

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