This can be dedicated to those of you who want to spend money on individual stocks. I want to share along with you the strategy I have used over time to pick out stocks i have discovered to get consistently profitable in actual trading. I want to use a mix of fundamental and technical analysis for picking stocks. My experience has demonstrated that successful stock selection involves two steps:
1. Select a regular while using fundamental analysis presented then
2. Confirm the stock is definitely an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being above the 100-Day EMA
This two-step process enhances the odds the stock you end up picking is going to be profitable. It now offers a transmission to trade Automatic Income Method that has not performed needlessly to say if it’s 50-Day EMA drops below its 100-Day EMA. It can be another useful way of selecting stocks for covered call writing, a different sort of strategy.
Fundamental Analysis
Fundamental analysis is the study of economic data including earnings, dividends and your money flow, which influence the pricing of securities. I use fundamental analysis to help select securities for future price appreciation. Over time I have used many methods for measuring a company’s rate of growth so as to predict its stock’s future price performance. I used methods including earnings growth and return on equity. I have discovered why these methods are certainly not always reliable or predictive.
Earning Growth
For instance, corporate net earnings are susceptible to vague bookkeeping practices including depreciation, cash flow, inventory adjustment and reserves. These are susceptible to interpretation by accountants. Today inside your, 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 his or her balance sheet for things such as failed mergers or acquisitions, restructuring, unprofitable divisions, failed product, etc. Many times these write-offs are certainly not reflected like a continue earnings growth but appear like a footnote over a financial report. These “one time” write-offs occur with an increase of frequency than you might expect. Many firms that make up the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other indicator, which I have found just isn’t necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a top return on equity with successful corporate management that’s maximizing shareholder value (the higher the ROE better).
Which company is much 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 greater ROE. How is possible?
Return on equity is calculated by dividing a company’s net profit by stockholder’s equity. Coca-Cola can be so over valued what has stockholder’s equity is only comparable to about 5% with the total market value with the company. The stockholder equity can be so small that almost any amount of net profit will create a favorable ROE.
Merrill Lynch however, has stockholder’s equity comparable to 42% with the market value with the company and requires a greater net profit figure to produce a comparable ROE. My point is always that ROE doesn’t compare apples to apples therefore is very little good relative indicator in comparing company performance.
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