This really is dedicated to those of you who want to invest in individual stocks. I has shared together with you the techniques I have used over the years to pick out stocks that I have found being consistently profitable in actual trading. I prefer to use a mixture of fundamental and technical analysis for choosing stocks. My experience shows 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 over the 100-Day EMA
This two-step process raises the odds that the stock you select is going to be profitable. It now offers a sign to sell options which includes not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It can be another useful means for selecting stocks for covered call writing, a different sort of strategy.
Fundamental Analysis
Fundamental analysis will be the study of economic data such as earnings, dividends and money flow, which influence the pricing of securities. I use fundamental analysis to aid select securities for future price appreciation. Over many years I have used many strategies to measuring a company’s rate of growth in an attempt to predict its stock’s future price performance. I manipulate methods such as earnings growth and return on equity. I have found why these methods are certainly not always reliable or predictive.
Earning Growth
For instance, corporate net income is be subject to vague bookkeeping practices such as depreciation, cash flow, inventory adjustment and reserves. These are all be subject to interpretation by accountants. Today inside your, corporations are under increasing pressure to conquer analyst’s earnings estimates which results in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their own balance sheet for things such as failed mergers or acquisitions, restructuring, unprofitable divisions, failed developing the site, etc. Many times these write-offs are certainly not reflected being a continue earnings growth but arrive being a footnote over a financial report. These “one time” write-offs occur with an increase of frequency than you may expect. Many companies that form the Dow Jones Industrial Average have taken such write-offs.
Return on Equity
One other indicator, which i’ve found is not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a top return on equity with successful corporate management that’s maximizing shareholder value (the higher the ROE the higher).
Recognise the business is much more successful?
Coca-Cola (KO) having a Return on Equity of 46% or
Merrill Lynch (MER) having a Return on Equity of 18%
The answer then is Merrill Lynch by measure. But Coca-Cola has a much higher ROE. How is possible?
Return on equity is calculated by dividing a company’s net income by stockholder’s equity. Coca-Cola is indeed over valued that its stockholder’s equity is merely comparable to about 5% with the total market price with the company. The stockholder equity is indeed small that nearly any amount of net income will develop a favorable ROE.
Merrill Lynch on the other hand, has stockholder’s equity comparable to 42% with the market price with the company and requirements a much higher net income figure to produce a comparable ROE. My point is that ROE doesn’t compare apples to apples then isn’t a good relative indicator in comparing company performance.
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