That is dedicated to those which purchase individual stocks. I has shared along the techniques Personally i have tried in the past to pick out stocks i have discovered being consistently profitable in actual trading. I like to utilize a blend of fundamental and technical analysis for choosing stocks. My experience has shown that successful stock selection involves two steps:
1. Select a regular using the fundamental analysis presented then
2. Confirm that the stock can be an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being across the 100-Day EMA
This two-step process increases the odds that the stock you end up picking will probably be profitable. It even offers a transmission to trade Chuck Hughes which has not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is also a useful way of selecting stocks for covered call writing, yet another kind of strategy.
Fundamental Analysis
Fundamental analysis could be the study of monetary data such as earnings, dividends and cash flow, which influence the pricing of securities. I use fundamental analysis to assist select securities for future price appreciation. Over time Personally i have tried many methods for measuring a company’s rate of growth in an attempt to predict its stock’s future price performance. I have used methods such as earnings growth and return on equity. I have discovered these methods usually are not always reliable or predictive.
Earning Growth
For example, corporate net earnings are subject to vague bookkeeping practices such as depreciation, earnings, inventory adjustment and reserves. These are typical subject to interpretation by accountants. Today more than ever, corporations are under increasing pressure to conquer analyst’s earnings estimates which ends up in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on the balance sheet for specific things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed website, etc. Many times these write-offs usually are not reflected as being a drag on earnings growth but appear as being a footnote over a financial report. These “one time” write-offs occur with increased frequency than you might expect. Many firms that form the Dow Jones Industrial Average have such write-offs.
Return on Equity
Another popular indicator, which i’ve found is not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a high return on equity with successful corporate management which is maximizing shareholder value (the larger the ROE the greater).
Which company is a bit more successful?
Coca-Cola (KO) which has a Return on Equity of 46% or
Merrill Lynch (MER) which has a Return on Equity of 18%
The answer is Merrill Lynch by any measure. But Coca-Cola carries a greater ROE. How is this possible?
Return on equity is calculated by dividing a company’s post tax profit by stockholder’s equity. Coca-Cola is indeed over valued the reason is stockholder’s equity is only equal to about 5% in the total market value in the company. The stockholder equity is indeed small that nearly any amount of post tax profit will produce a favorable ROE.
Merrill Lynch however, has stockholder’s equity equal to 42% in the market value in the company and requires a greater post tax profit figure to create a comparable ROE. My point is ROE won’t compare apples to apples then is not a good relative indicator in comparing company performance.
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