Rant About It

Archive for December, 2006

Stocks: Learn the A-Z About It

Posted by rantaboutit on December 20, 2006

I have been trading in stocks for a year now…I must say I have matured alot. but there are still alot of things I have no idea about. I made money and lost money, learned important lessons on the way…

All you newbees to stocks, before buying a stock, one should try to analyse the stock.

There are 2 basic analysis which can help one understand more about the stock.
1. Fundamental Analysis
2. Technical Analysis

What is fundamental analysis ?
To understand a stock, you should understand the company fundamentals. One should try to answer the following questions. Answering these questions will open your mind to whether is it worth investing in the company stock. Company with solid profile, brand, business/revenue model is always a good buy.

– What does the company do ?
– What is the business model of the company ?
– What sector does the company fall in ?
– Is the sector hot in the current market trend ?
– How efficient is the business model of the company in that sector ?
– How good is the management ?
– What is the company market capital ?
– How many projects/deals have they won ?
– What is the cash flow of the company ?

What is technical analysis ?
There are alot of analyst/traders who buy/sell/short stocks based only on technical analysis. Technical analysis helps one understand the direction of the stock. Stock movement is predicted based on past performance. Also future estimated growth of the company is used a factor to look for long term stocks.

– What is the company earnings ? What is EPS ?
– What is P/E ratio ?
– What is PEG ?
– What is SMA ? What is EMA ? What is MA ?
– What indicators to monitor ?
– Was there any insider trading ?
– What is resistance level and support level ?

Lets cut the crap with buzzwords, and try understanding what they actually mean.

EPS = Earnings per share.
EPS = (Earnings of the company – Dividend paid to investors)/Outstanding shares.
P/E = Price per earnings.
P/E = Price of the stock/EPS
PEG = Price per future earning growth
SMA = Simple Moving Average
EMA = Exponential Moving Average
MACD = Moving Average Convergence Divergence
ROC = Rate of Change

SMA/EMA tells about the average movement over a period of time. The difference between SMA and EMA is that, for EMA more weight is given to the latest data. One can calculate short-term average (20-day) or long-term average (50-day) depending on the type of investor/trader one is to understand stock momentum. Typically, upward momentum is confirmed when a 20-day EMA crosses above a 50-day EMA. Downward momentum is confirmed when a 20-day EMA crosses below a 50-day EMA.

The MACD is a technical indicator which is calculated by taking 2 EMA periods (say 50-day and 20-day) and subtracting the 50-day EMA from the 20-day EMA. A nine-day EMA of the MACD, called the signal line, is then plotted on top of the MACD, to indicate for buy and sell signals. When the MACD falls below the signal line, it is an indication of bear market, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, it is an indication of bull market, which suggests that the price of the asset is likely to experience upward momentum. When the stock price diverges from the MACD, it signals the end of the current movement trend. Also when the MACD rises dramatically, it indicates that the stock is overbought and will soon return to normal levels.

ROC is a technical indicator which measures the % change between 2 time range. Say for the past 2 years. ROC is also termed the price momentum indicator since it helps understand the rise and fall in the momentum of the stock.

Insider trading is also an important factor to decide buying/selling of stocks. When the insiders of the company buy more stocks, is always an indication that the management is positive about the company growth, whereas when the insiders sell company stocks, it is an indication of weak expected growth.

That brings us to Resistance level and support level. Resistance level is the level where the stock price meets alot of resistance from the investors/traders. This is the level where one can expect alot of selling to happen which will eventually bring the price down. If the resistance level is broken, the current trend of the stock is bullish. Similarly support level is the level where the stock price finds alot of support from the investors/traders. This is the level where one can expect alot of buying to happen which will eventually drive the stock price up.

In the near future i will try to run through one stock and understand the fundamental and technical analysis of the stock.

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