YOU can use two primary approaches to analyze a stock: fundamental analysis and technical analysis.
- Fundamental analysis involves looking at a company’s underlying business metrics, such as revenue, earnings and debt.
- Technical analysis involves looking only at a stock’s recent price movements and identifying buy and sell signals in its chart.
Let’s take a look at how traders use fundamental analysis:
- Fundamental analysis is a method of determining a stock’s fair market value.
- Search for stocks that are undervalued.
- Stock is undervalued if the current price is lower than the fair market value (a good buy).
- Stock is overvalued if the current price is higher than the fair market value (expensive buy).
- Stock is undervalued if it has low P/E (Price/Earnings) ratio.
- Use fundamental analysis to measure intrinsic value by examining financial and economic data.
- Technical analysis looks at statistical trends of price and volume (instead of intrinsic value).
- Fundamental analysis focuses on true value (while technical analysis identifies a good time to enter or exit a trade).
- Fundamental Analysis is based on financial statements (whereas technical analysis is based on charts and price movements).
- Be aware of macroeconomic factors such as the state of the economy (Currently, we have a recovering economy with threats of inflation) and industry conditions to microeconomic factors like the company’s management.
Elements of fundamental analysis include:
- Earnings per Share (EPS).
- Price to Earnings Ratio (P/E).
- Projected Earnings Growth (PEG).
- Price to Sales Ratio (P/S).
- Price to Book Ratio (P/B).
- Dividend Payout Ratio.
- Dividend Yield.
- Return on Equity.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to [email protected].