That is dedicated to those of you who wish to spend money on individual stocks. I want to share together with you the ways I have tried personally over time to choose stocks that I are finding to become consistently profitable in actual trading. I prefer to work with a mixture of fundamental and technical analysis for picking stocks. My experience has demonstrated that successful stock selection involves two steps:
1. Select a standard while using fundamental analysis presented then
2. Confirm how the stock is an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being above the 100-Day EMA
This two-step process raises the odds how the stock you decide on will be profitable. It offers a transmission to offer ETFs which includes 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, a different type of strategy.
Fundamental Analysis
Fundamental analysis may be the study of economic data such as earnings, dividends and cash flow, which influence the pricing of securities. I use fundamental analysis to aid select securities for future price appreciation. Over many years I have tried personally many means of measuring a company’s rate of growth so that they can predict its stock’s future price performance. I used methods such as earnings growth and return on equity. I are finding why these methods are not always reliable or predictive.
Earning Growth
By way of example, corporate net income is be subject to vague bookkeeping practices such as depreciation, income, inventory adjustment and reserves. These are typical be subject to interpretation by accountants. Today as part of 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 his or her balance sheet for such things as failed mergers or acquisitions, restructuring, unprofitable divisions, failed website, etc. Many times these write-offs are not reflected as a continue earnings growth but instead show up as a footnote over a financial report. These “one time” write-offs occur with additional frequency than you could possibly expect. Many businesses that constitute the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other popular indicator, which has been found just isn’t necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a high return on equity with successful corporate management that is certainly maximizing shareholder value (the greater the ROE the higher).
Which company is much more successful?
Coca-Cola (KO) with a Return on Equity of 46% or
Merrill Lynch (MER) with a Return on Equity of 18%
The reply is Merrill Lynch by any measure. But Coca-Cola has a better ROE. How is that this possible?
Return on equity is calculated by dividing a company’s post tax profit by stockholder’s equity. Coca-Cola is so over valued the reason is stockholder’s equity is only equal to about 5% with the total market price with the company. The stockholder equity is so small that nearly any amount of post tax profit will develop a favorable ROE.
Merrill Lynch on the other hand, has stockholder’s equity equal to 42% with the market price with the company and requirements a much higher post tax profit figure to produce a comparable ROE. My point is always that ROE doesn’t compare apples to apples then is not a good relative indicator in comparing company performance.
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