One way to trade is trading on fundamentals. Usually this is a long term approach for the purposes on the site. There are many factors that can be included under the definition of fundamental trading. When most people reference fundamentals they are talking about Earnings Per Share (EPS), Stock take overs, stock buy backs, and long term market trends. For my guide, I will also include looking at world market countries, regional and country specific influences , as well as psychological market outlook.
Earnings Reports, EPS, and Financial Statements
The most common fundamental that you see analysts and big banks use, is the dissection of company financials. Each quarter, public companies are required to release their financial information. This pretty much means the company is opening up its books to the public. You are allowed to take a hard analytic look at their financials.You can go through their balance sheet, income statement, and cash flow statement. This is basically a way to judge the overall success and health of a company. Consider it like a yearly physical a doctor does on a patient. The release of these statements usually coincides with an earning call. The overall benchmark most analysts shoot for with this information is the EPS or Earnings Per Share. This is a target number that analysts try to predict before a company releases their information. This is a great fluctuated and variable on if a stock will go up or down after a call. For example, if a company beats analyst expectations on EPS, the stock will usually go up, and if the opposite is true, goes down. Many traders and companies focus on gauging the EPS correctly and will execute trades as this is usually a good chance to make money on a big market move. There are many other ways to trade on this number but that is something covered in my intermediate to advanced guide.
2. Stock Take Overs and Stock Buy backs
These two actions also greatly affect the price and movement of stocks. A stock take over or a company buying another, will usually greatly affect the value of the stock in the companies involved. In the short term it usually drives up the stock of the company being bought and devalues the stock of the company buying. However, in the long term the stock taking over, might gain value and benefit from the synergies created when taking over a company.This can mean greater future growth and economic health for the company .
A stock buy back is when a company purchases back stock it had initially sold to raise money . This means that company is essentially invested back into itself, and usually is an indicator the company is doing great well. When a company announces that it will be taking this action, the value usually jumps as a result.
3. World and National Economies
A big factor in just having a view in the market, is just your overall view of the world economic conditions. Is there a lot of global turmoil do to wars, disease outbreaks, or massive famines? Or are there new scientific discoveries, technologies or untapped resources being found? Before you trade it is good to create a global a national view of the world and get a gauge for its economic health. This view should be adjusted and recalibrated daily , as you do research and stay current on new and economic issues. There are some products like commodities and currency that are greatly affected by world trade and politics. For our purposes, we will just focus on the U.S. and try to understand current political policies, economics, and pertinent company issues affecting our trades.
Psychological aspects make up market conditions as well. How the general public views the global economy and current market conditions will also affect how things move. If things are becoming uncertain about how the market will move will change the way money is being invested or pulled out of the stock market. So taking a gauge in market perception and market optimism/pessimism will also influence how you trade. Even if the above 3 fundamentals all look great, if the general population still is uneasy about the future state of the economy, politics and other issues the stocks still might not move accordingly.
There are of course more fundamentals and different aspects of howe each are analyzed. These are the major aspects I would consider when you create your market View. Having a View is an important tool to develop when you get into trading. It avoids investing without any direction and having a solid View will also give you more confidence in your decisions . It also will give you a better way to analyze your decisions and adjust what was wrong with your trades if they go South. As always, feel free to message me with any questions or comments. Look at my blogs, videos and guides for more information .