What do you look at when you’re buying a car? The make? The reviews? What it has under the hood? The specs? Chances are that you use all of these and more.
Similarly, do you wonder how to evaluate a stock? You might know the company’s brand and products, but you’ll need to get a more complete picture before feeling ready to make a purchase. Two methods are generally used to answer this question: fundamental and technical analysis.
The term fundamental analysis might contain a few too many syllables but it also suggests its meaning. This is the art of looking at how a stock is doing based on the things that are fundamental to the company or a business’ “fundamentals.”
So what is fundamental to the company? Sales.
Think about it. What is the one thing that a company needs to survive? That’s right. Money. And where does it get money? Sales. One of the clearest indicators that a company is doing well is increasing sales.
Check out your desired company’s sales on the Wall Street Survivor Quote page.
What else is fundamental to the company? Profit.
Increasing sales is one thing. But what is the bottom line? How much money remains after the company’s costs are taken care of? This is profit or net income to be exact. Increasing sales don’t mean much if they can’t even cover expenses. Think about yourself. How good is a salary increase if after paying for everything, you find yourself with the same amount of debt because your expenses have also increased.
To see your favourite company’s net income, check out it on the Detailed Quote page on Wall Street Survivor.
Compare some ratios
Numbers and figures are great but knowing about a company in isolation is not helpful. Ratios allow you to compare the performance of one company with another company’s to get a feel for which company’s stock will perform better. For example, the Price to Book ratio will tell you how much more (or less) the companies’ stock is worth compared to what the company is actually worth on the books. A lower P/B ratio between similar companies may be a sign that a company is undervalued.
There are many ratios that can be used to compare fundamentals at a glance. Other commonly used rations include the Price to Equity ratio and the Price to Sales ratio.
Check out a given company’s P/B ratio, compare it to a similar company’s P/B ratio, and trade the lower one on Wall Street Survivor.
Let’s get technical
The second method for evaluating a company’s future growth is called technical analysis. Again, as the name suggests, this involves looking at technical formulas and statistics to attempt to capture trends in the company’s past performance. Luckily, these calculations are usually represented through more user-friendly charts and graphs that are used to make investment decisions.
The basics of technical analysis
Technical analysis can get very complex very fast. A huge variety of figures and algorithms are used to build projections, but they all follow two main principles. Price and Volume. Price refers both to a stock’s past price and what it is currently trading at right now. Volume refers to the number of people trading a stock at a specific point in time. These two measures form the backbone of all the other technical analysis tools, which are in turn used to come up with all sorts of charts and graphs.
Some basic technical tools to get you started
Since the basics are price and volume, the first and easiest thing to look at is the current price of the stock. Compare this to the 52 week high or low of the stock price. Prices have a tendency to bounce away from the 52 week lows and gravitate towards their 52 week highs.
You can also look at the volume of a stock to get a sense of how much it is traded. If you see the volume rising, and the stock price going down, you can rest assured that more people are selling the stock than buying it. This could offer you an opportunity to buy the stock cheap.
To practice trading on volume and 52 week highs and lows, check out our quote page for a given stock.
Which one should I use?
In practice the best way to go about evaluating a stock is to take advantage of both fundamental and technical analysis. Professionals use fundamental analysis to get a sense of which direction a stock is headed, and technical analysis to pinpoint when they should get in or when they should get out.
To try your hand at analyzing a stock using both methods for free at Wall Street Survivor.