That is dedicated to those of you who want to purchase individual stocks. I has shared along with you the techniques I have tried personally through the years to choose stocks that we are finding to get consistently profitable in actual trading. I like to work with a blend of fundamental and technical analysis for selecting stocks. My experience has demonstrated that successful stock selection involves two steps:
1. Select a standard 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 boosts the odds that this stock you choose will probably be profitable. It now offers an indication to sell options that has not performed not surprisingly 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 type of strategy.
Fundamental Analysis
Fundamental analysis is the study of economic data for example earnings, dividends and funds 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 strategies to measuring a company’s rate of growth so as to predict its stock’s future price performance. I manipulate methods for example earnings growth and return on equity. I are finding that these methods aren’t always reliable or predictive.
Earning Growth
For instance, corporate net income is be subject to vague bookkeeping practices for example depreciation, cash flow, inventory adjustment and reserves. These are be subject to interpretation by accountants. Today more than ever, corporations they are under increasing pressure to overpower 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 specific things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed website, etc. Many times these write-offs aren’t reflected as a continue earnings growth but rather appear as a footnote on a financial report. These “one time” write-offs occur with additional frequency than you could possibly expect. Many companies which make up the Dow Jones Industrial Average have taken such write-offs.
Return on Equity
One other indicator, which has been found is not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a high return on equity with successful corporate management that’s maximizing shareholder value (the better the ROE the greater).
Recognise the business is a bit more successful?
Coca-Cola (KO) which has a Return on Equity of 46% or
Merrill Lynch (MER) which has a Return on Equity of 18%
The answer then is Merrill Lynch by any measure. But Coca-Cola has a higher ROE. How is that this possible?
Return on equity is calculated by dividing a company’s net gain by stockholder’s equity. Coca-Cola can be so over valued that its stockholder’s equity is merely equal to about 5% with the total rate with the company. The stockholder equity can be so small that just about anywhere of net gain will create a favorable ROE.
Merrill Lynch alternatively, has stockholder’s equity equal to 42% with the rate with the company and needs a much higher net gain figure to create a comparable ROE. My point is ROE won’t compare apples to apples therefore isn’t a good relative indicator in comparing company performance.
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