That is dedicated to those of you who want to purchase individual stocks. I want to share along with you the methods I have used over time to select stocks that I have found being consistently profitable in actual trading. I love to make use of a combination of fundamental and technical analysis for selecting stocks. My experience has demonstrated that successful stock selection involves two steps:
1. Select a share while using fundamental analysis presented then
2. Confirm that this stock is definitely an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being higher than the 100-Day EMA
This two-step process increases the odds that this stock you end up picking is going to be profitable. It now offers a sign to trade ETFs which has not performed as expected if it’s 50-Day EMA drops below its 100-Day EMA. It is also a useful means for selecting stocks for covered call writing, a different sort of strategy.
Fundamental Analysis
Fundamental analysis is the study of economic data like earnings, dividends and your money flow, which influence the pricing of securities. I use fundamental analysis to help you select securities for future price appreciation. Over recent years I have used many methods for measuring a company’s rate of growth so that they can predict its stock’s future price performance. I purchased methods like earnings growth and return on equity. I have found the methods are certainly not always reliable or predictive.
Earning Growth
For instance, corporate net income is be subject to vague bookkeeping practices like depreciation, income, inventory adjustment and reserves. These are typical be subject to interpretation by accountants. Today more than ever before, corporations they are under increasing pressure to beat analyst’s earnings estimates which results in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on the 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 rather show up being a footnote with a financial report. These “one time” write-offs occur with more frequency than you could expect. Many firms that make up the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other indicator, which i’ve found is just not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a higher return on equity with successful corporate management that is maximizing shareholder value (the greater the ROE the better).
Which company is a bit 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 includes a better ROE. How is this possible?
Return on equity is calculated by dividing a company’s net profit by stockholder’s equity. Coca-Cola can be so over valued the reason is stockholder’s equity is just corresponding to about 5% in the total rate in the company. The stockholder equity can be so small that almost any amount of net profit will create a favorable ROE.
Merrill Lynch conversely, has stockholder’s equity corresponding to 42% in the rate in the company and requirements a much higher net profit figure to create a comparable ROE. My point is that ROE won’t compare apples to apples therefore is not an good relative indicator in comparing company performance.
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