If you are new to stock trading, you would most certainly agree that the fundamental analysis of stocks and trading research are two key factors to consider before taking a plunge into the game. Sure, doing this is no fun at all; however, the value thereof is indispensable to you in the long and short of it.
It is without a doubt said that you can make money on markets. The biggest challenge, however, is you knowing where to start, especially if you are new to stock trading. For this very reason, it is of utmost importance that you understand the basics in analyzing stocks. The following 3 step, DIY guide to the fundamental analysis of stocks will assist in getting you on the right track in no time.
When doing your research, it is important that you consider both the historical as well as present financial data available to you. This is, above all parameters, the most important indicator available to you in stock trading analysis.
1. Income Statements – These statements will give you a better idea of the company’s revenues, expenses, and profits. Good companies will show revenue exceeding expenses and bad companies will show expenses exceeding revenue. If this is the case, move on. You should also look at revenue increases versus expenses increases. A good company should be able to increase revenues without having to increases expenses at a 1:1 ratio. Think about it. Consider a real estate business as an example. Each time a new property is taken on, the business should not have to hire a new worker for the increase in business which is that one property increase. Indeed, the office staff should be able to absorb new business at an expense rate less than a 1:1 ratio or for every $1 increase in revenues, there should not be a $1 increase in expenses. If you see a business with expenses increasing in lock step with revenue, that is a warning signal that something is wrong.
2. Balance Sheets – These sheets provide valuable information that help traders better understand the financial status of a company. Here you can also see the equity of the business, liabilities, and the value of their assets.
3. Cash Flow – Does the company have a good cash flow? This statement reports the incoming as well as the outgoing cash flow of the company. Generally speaking, this is often categorized into investment cash flow, operating cash flow, or financing cash flow.
These are just some of the most important indicators used in the fundamental analysis of stocks. By implementing this into your own fundamental analysis, the overall representation of the company will soon come to life – making your task in mastering stock trading much easier.