Learn To Trade Stocks Like a Pro With Fundamental Analysis
Learn to trade stocks like a pro by understanding fundamental analysis and by reviewing the basics over and over again. I know that as soon as I say, “review the basics”, everyone wants to move on to something else because, after all, they already mastered the basics years ago.
Learn to Trade Stocks
It is important that you realize when learning how to trade stocks is that trading isn’t like other disciplines. You have to constantly review the basics. The best traders in the world all say that they review the basics on a regular basis in order to keep themselves focused.
One of the reasons why you have to continually review the basics of trading is that every trade is different. You almost never trade stocks back to back for the exact same reason. As a result, over time, you lose focus on certain basic aspects of trading because you haven’t actually used them in such a long time.
Fundamental Analysis vs Technical Analysis
Fundamental analysis is studying companies financial statements. Technical analysis is studying companies price movements on a stock chart. Do not think of the two as separate competing entities. Think of fundamental analysis and technical analysis as parts that work together in your swing trading strategy.
Here is something that you will not learn from a fundamental analysis pdf. Using Finviz fundamental analysis software you can bridge fundamental analysis vs technical analysis.
Fundamental Analysis Tools
Go to Finviz and click on “Screener” at the top of the window:
Click on “All” on the “Filters” bar:
The “All” option combines both fundamental analysis and technical analysis into a single interface.
Debt to Equity Ratio
In earlier lessons I have talked about the importance of a healthy debt to equity ratio. Repeating something in a different way often forms synaptic pathway connections in the brain which cause an “aha” moment. It also helps with memorization.
Set the “Debt/Equity” to “Low (
Total debt to equity is a measure of a company’s financial leverage calculated by dividing its liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets.
A company with a lot of cash and little debt has options. It can buy other companies or patents. It is also an attractive buyout candidate by a larger corporation.
Companies with a lot of cash and little or no debt are less likely to do a stock offering to raise cash. Never hold on to a stock that surprises you with a stock offering to raise cash. It is almost always best to sell as quickly as possible on the news of a stock offering. If a company has a lot of cash and little or no debt, it means they can fund existing operations without diluting shareholder value.
Adding “Debt/Equity” to your stock screens can make a huge difference in the number of winning trades you have. Never forget, cash is king.
Frequently Asked Questions about Fundamental Analysis
What are the three fundamental analysis strategies?
The three fundamental analysis strategies that are most often used are: earnings per share (EPS) growth quarter over quarter, earnings per share (EPS) growth over the past 5 years, and gross margin.
Earnings Per Share Growth Quarter over Quarter
Earnings per share is a company’s profit allocated to each share. It is calculated as follows:
Traders using fundamental analysis look for earnings per share (EPS) to increase at the rate of 25% or more from the last quarter. This metric is called the EPS growth quarter over quarter.
Earnings Per Share Growth Past 5 Years
The second most used fundamental analysis metric is the earnings per share growth over the past 5 years. Traders look for the past 5 year EPS growth to be greater than 25%.
OpenMarkets Australia posted the excellent video below called Earnings Per Share Growth Rate.
TheMarketsUpChuck posted the video below showing an 11 year history of a stock and how closely the stock price is correlated to the EPS growth.
Gross margin is a company’s total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage:
The gross margin represents the percent of total sales revenue that the company gets to keep after paying the costs of producing the goods and services sold. The higher the percentage, the more the company keeps on each dollar of sales to service its other costs and obligations.
Foundry Administration posted the excellent video below called Gross Margin.
The Motley Fool posted the video below called What is a Gross Margin?
What does fundamental analysis mean?
Fundamental analysis means using financial data from a company’s books to evaluate the value of a stock.
Traders who do fundamental analysis often look at a company’s Income Statement, Balance Sheet, and Cash Flow.
Sasha Evdakov posted the excellent educational video below called Stock Fundamental Analysis: Two Methods – Top-Down and Down-Up Approach.
StockGoodies Chart-School posted the great video below called How to do Fundamental Analysis on Stocks.
What does fundamental analysis consist of?
Fundamental analysis consists of analyzing a company’s financials in an attempt to predict future price action of that company’s stock.
Fundamental analysis also consists of focusing on political and economic events in an effort to predict how the market will respond based on market movement in the past.
Fundamental analysts who look at a company’s books often favor the PE, PEG, PEGY, and the return on equity (ROE) ratios.
Alan Ellman posted the excellent video below called Fundamental Ratios: PE, PEG and PEGY.
Return on Equity (ROE)
Return on Equity (ROE) is the amount of net income returned as a percentage of shareholders equity.
It is calculated as follows:
Traders that do fundamental analysis focus on the return on equity (ROE) of a company because it measures how much profit a company generates with the money shareholders have invested.
CHjortInvest posted the four videos below called Fundamental Analysis the Easy Way.
Subjectmoney posted the awesome 3 part video serious below called Fundamental Analysis Tutorial: Financial Ratios.
What is debt load?
Debt load is the amount of debt a company has. Traders doing fundamental analysis extract the debt load from a company’s Balance Sheet.
The reason traders focus on debt and debt ratios is because they want to determine the ability of a company to pay its debt.
If we look at Google’s Balance Sheet as compiled by Yahoo! Finance:
We can see that as of September 30, 2013, Google had a debt load (the Total Liabilities line item) of just over $22 billion (numbers above in thousands).
Brian Routh TheAccountingDr posted the video below called Financial Statement Analysis: Ability to Pay Long-Term Debt.
What is operating margin formula?
Operating margin is a measurement of what percentage of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A good operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.
Operating margin is calculated as follows:
Let’s look at the stock of Google on Yahoo! Finance:
Looking at the Income Statement of Google, we can get Operating Income and Revenue and calculate that Google makes 23% or $0.23 on every $1 in sales.
Traders that do fundamental analysis look at operating margin as a measurement of how much a company makes on each dollar of sales. The higher the operating margin, the better.
What is an acceptable operating margin?
That depends on the sector and industry you are researching. Some industries have higher labor or materials costs than others. For example, the computer software industry has an average operating margin of 23.16% while the Engineering and Construction industry has an average operating margin of 3.32%.
What is an acceptable operating margin in one industry, may not be an acceptable operating margin in another. For this reason you need to compare companies within the same industry and you need to know what the average operating margin is for that industry.
NYU Stern and Aswath Damodaran posted a table of operating margins by industry here.
PerfectStockAlert.com posted the great video below called Operating Margin on the Income Statement.
Sentdex posted the excellent video below called Fundamental Investing – What is Operating Margin.
In the video lesson below, I talk about the importance of going over the basic rules of trading and I show you one such rule: total cash versus total debt. It is amazing how, after you use a stock screener, if you make sure the company has a good amount of cash on hand with little debt, this one fact alone can greatly improve your chances of hitting a winner. The reason is that you don’t want to be in a stock that has a stock offering to raise money to continue operations. Stock offerings usually cause a stock to plummet in value by the amount that a company’s shares were diluted (outstanding shares increased). When a company has a lot of cash and little or no debt, it means they are able to pay the bills from money being brought in and therefore it is very unlikely that they will need to go to the bank to borrow money. Finally, you’ll hear Jason Bond talk about the importance of looking up the cash and debt metrics, and what basic things you need to avoid in your stock trading if you hope to survive on Wall Street.