Fundamental Analysis – Looks at a company’s story, industry, and sector; market potential; competitive position; balance sheet; profit and loss statement; sales and earnings growth; return on equity; debt structure; dividend yield, etc. in order to determine the company’s “fair” value and appreciation potential. The most widely used yardsticks are:
EPS (Earnings per Share)
Company’s annual earnings divided by the number of shares outstanding. The faster a company grows its earnings, the greater the stock’s appreciation potential.
P/E (Price to Earnings Ratio)
The current stock price divided by the EPS. The lower the P/E, the cheaper the stock is believed to be, and vice versa. In valuing stocks, some also use future P/E (fP/E) – next 12 months projected earnings divided by the current price per share (PPS).
PEG (P/E to Growth Ratio)
P/E divided by the annual earnings growth rate. The faster a company is growing, the higher the P/E it is expected to command. A PEG < 1 indicates that a stock is cheap relative to its growth rate, and vice versa.
Looks at a stock’s price and volume action over time to identify recurring patterns that could be used to predict future performance. Charting as a graphic representation of those moves is the most popular type of technical analysis.
Charts can be:
– arithmetic or logarithmic;
– line, P&F (point and figure), candlestick, bar or OHLC (Open, High, Low, Close);
– intraday, daily, weekly, monthly.
Most charting services allow you to toggle between arithmetic or logarithmic; generate intraday, daily or weekly views; and switch from line to bar to P&F to candlestick. There is no one best way or time frame. The key is to find a method that works for you and stick with it.
There are many books, websites, and services on charting, some of which are listed here: tradingzoomhq.blogspot.com/.
Some systems, like CANSLIM, use a blend of fundamental and technical analysis.
Describing specific systems goes beyond the scope of this series. The bottom line is: since you decided to trade stocks, you should ignore analysts’ opinions and recommendations in favor of your own research. Otherwise, you will continue to be at the mercy of institutions that you are trying to get away from. Besides, analysts as a group – surprise, surprise! – have a dismal record of picking stocks.