Researching Stocks


Q.: Can you give me ideas on how to research stocks?

A: You first hear mention of a company from a friend's tip or newspaper article or newsletter - how do you go on researching it? Research comes in all different forms, whether looking at in-depth financial company reports, studying the company history, checking historical data, or, a more practical approach to fundamental analysis. For instance, I know of a friend in Australia who wanted to buy some building stock, so he found a couple of companies that made bricks, bought some bricks and cement from them and made a couple of small walls in his backyard. He looked at the quality of the bricks, inspected the quality of service, the price, the clarity of the instructions on the cement mix etc...and bought the company he felt was the best - without even looking at common denominators such as net debt, EPS, director holdings or any of that stuff. Made a good profit too! My point is, trading or investing can be as hard or as easy as you want, it can even be fun.

 

Usually, however, the first place to start your research is to check-out recent company announcements which should include the latest financial reports. Most CFD providers offer access to a searchable Reuters or Dow Jones real-time news feed and this together with director stock dealings and future-looking analysts expected earnings estimates should prove invaluable. Functionality to chart a share price performance and compare it to other companies in the same sector should also prove useful. In most cases the share price will already have built the expected numbers, but sometimes the financial reports can create big movements. A good way to study share price movement is to monitor just a few stocks and become familiar with them, in due course, you'll understand the price movements better and you'll be able to spot good trades more easily.

However, here you also need to consider the general picture of the economy i.e. the fundamentals of the economy taken in context. If, for example, the earnings for Company ABC are 25% higher than last year, then you must also compare the economic conditions of last year and this year to fully understand the real value of the increase. For instance, care needs to be taken on the corporate earnings announcements being released if there has been considerable cost-cutting, inventory reductions or lowered expectations. Thus, the most valuable numbers are the revenue figures, cash flow, strength of the balance sheet and liquidity of the stock (are you able to buy and sell shares easily?).

Note: Keep a diary of why you have decided to deal in certain shares and why you kept/dumped them - that gives you a good reference for checking back past activity. Also helpful is a stock screener that can help a lot with searching for prospective shares and within minutes discounted them or put them on a short list for further examination...

Whatever stocks you invest in, do your homework, don't expect to retire next year, and good luck!

Q.: But how do you predict the market direction?

A: My strategies are varied. I use a mixture of technical analysis back by sound(ish) fundamentals and beyond that I get ideas from here, there and everywhere.

I also use lots of different things to give me a clue of market direction: resistance and support levels, candlesticks, different timeframes, look for trending markets, read fundamentals (my favourite trade setup is a technical trade with recent fundamental news backing it). Sometimes I just simply watch for price action and move aboard a moving train.

Before the open I check all the economic reports that are about to be released, speeches of central bankers - simply anything that could move the market. then I try to define important levels in the markets I trade. I do this through my own analysis and through reading analyst commentaries. that's how I get a picture of the market and its important levels. I am not interested in opinions of other market participants as this would influence my own opinion.

I really don't think it matters very much which stocks one picks, the secret to making money is knowing when to buy, when to add when to sell (or sell and buy back if going short).

Q.: What technical indicators do you use to help you predict the market direction?

A: Most of the technical analysis indicators help to highlight a specific area of price or volume behavior. However, beware that no particular indicator is perfect or infallible. Technical analysis indicators are particularly suited for stock-screening, but, whenever possible, you should base final decisions on the price chart of the instrument. If I were you I would choose two or three technical indicators and utilise them to confirm signals from each other.

Note also that no one technical indicator will work in all market conditions. Technical trend indicators are prone to losing money during a ranging market, as up and down price fluctuations in a narrow price range whipsaw traders in and out of positions. In a trending market, momentum oscillators can trigger exit signals too early and thus should only be used to confirm trend indicators.

It is useful to use a trend indicator in a longer time frame than the cycle being traded [for instance if trading the secondary cycle, use a 100-day EMO (exponential moving average) to indicate the direction of the primary trend].


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