This can be focused on those who want to purchase individual stocks. I wants to share with you the methods I have used through the years to choose stocks that I have discovered to get consistently profitable in actual trading. I prefer to make use of a mix of fundamental and technical analysis for choosing stocks. My experience has shown that successful stock selection involves two steps:
1. Select a stock while using the fundamental analysis presented then
2. Confirm that this stock is an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being above the 100-Day EMA
This two-step process boosts the odds that this stock you choose will probably be profitable. It now offers a signal to sell Automatic Income Method that has not performed not surprisingly 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, quantity strategy.
Fundamental Analysis
Fundamental analysis will be the study of financial data for example earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to help select securities for future price appreciation. Over the years I have used many methods for measuring a company’s rate of growth to try to predict its stock’s future price performance. I have used methods for example earnings growth and return on equity. I have discovered the methods are certainly not always reliable or predictive.
Earning Growth
For example, corporate net profits are subject to vague bookkeeping practices for example depreciation, earnings, inventory adjustment and reserves. These are common subject to interpretation by accountants. Today more than ever before, corporations they are under increasing pressure to get over analyst’s earnings estimates which leads to more aggressive accounting interpretations. Some corporations take special “one time” write-offs on his or her balance sheet for things such as failed mergers or acquisitions, restructuring, unprofitable divisions, failed website, etc. Many times these write-offs are certainly not reflected like a drag on earnings growth but alternatively appear like a footnote over a financial report. These “one time” write-offs occur with additional frequency than you might expect. Many companies that from the Dow Jones Industrial Average have got such write-offs.
Return on Equity
One other popular 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 which is maximizing shareholder value (the higher the ROE the greater).
Which company is much more successful?
Coca-Cola (KO) using a Return on Equity of 46% or
Merrill Lynch (MER) using a Return on Equity of 18%
The answer then is Merrill Lynch by measure. But Coca-Cola carries a better ROE. How is possible?
Return on equity is calculated by dividing a company’s net income by stockholder’s equity. Coca-Cola is really over valued the reason is stockholder’s equity is just add up to about 5% with the total rate with the company. The stockholder equity is really small that nearly anywhere of net income will develop a favorable ROE.
Merrill Lynch conversely, has stockholder’s equity add up to 42% with the rate with the company and requires a greater net income figure to make a comparable ROE. My point is the fact that ROE won’t compare apples to apples then isn’t a good relative indicator in comparing company performance.
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