The investor has many tools at hand when making decisions about which stocks to buy. One of the most useful of these is fundamental analysis – examining key ratios which show the worth of a stock and how a company is performing.
The goal of fundamental analysis is to determine how much money a company is making and what kind of earnings can be expected in the future. Although future earnings are always subject to interpretation, a good earning history creates confidence among investors. Stock prices increase and dividends may also be paid out.
Companies are required to report earnings on a regular basis and stock market analysts examine these figures to determine if a company is meeting its expected growth. If not, there is usually a downturn in the stock's price.
There are many tools available to help determine a company's earnings and its value on the stock market. Most of them rely on the financial statements provided by the company. Further fundamental analysis can be done to reveal details about the value of a company including its competitive advantages and the ratio of ownership between management and outside investors.
Every publicly traded company must publish regular financial statements. These statements are available in printed form or on the Internet. All statements must include an income statement, a balance sheet, an auditor's report, a statement of cash flow, a description of the business activities and the expected revenue for the coming year.
The auditor's report is one of the most important sections of the financial statement. The auditor is an independent Certified Public Accountant firm which examines the company's financial activities to determine if the financial statement is an accurate description of the earnings. The auditor's report contains the opinion of the auditor concerning the accuracy of the financial statement. A financial statement without an independent auditor's report is essentially worthless because it could contain misleading or inaccurate information. An auditor's report, although not a guarantee of accuracy, at least provides credibility to the financial statement.
Another important section of the financial statement is the balance sheet. This is a 'snapshot' as it were, of the financial condition of the company at a single point in time. The balance sheet shows the relationship between assets (cash, property and equipment), liabilities (debt) and equity (retained earnings and stock).
The income statement shows information about the revenue, net income, and earnings per share over a period of time. The top line of the income statement shows the amount of income generated by sales, underneath which the costs incurred in doing business are deducted. The bottom line show the net income (or loss) and the income per share.
The statement of cash flow is similar to the income statement – it provides a picture of a company's performance over time. The cash flow statement, however, does not use accounting procedures such as depreciation – it is simply an indicator of how a company handles income and expenses. A statement of cash flow shows incoming and outgoing cash from sales, investments, and financing. It is a good indicator about how the company is run on a day-to-day basis, how it handles creditors and from where it receives growth capital.
Bull Bear Markets
Bull and Bear are the terms to describe the general conditions of the stock mar...
Fundamental Analysis 2
Earnings per ShareThe overall earnings of a company is not in it...
Most stock trades are done through a broker an intermediary who takes orders and executes the...
All of these factors – low price, lack of standards, an...
Pink Sheets Stocks
Penny stocks are securities that are less than $5 in value. ...
These perks are not free – full service brokers charge the h...
There are many different stock indexes, the most common in the United States being the Dow Jones Industrial Ave...
The 'Stock Exchange' is the correct term for the physical location for trading ...
A contract to buy is called a 'call opti...
To a certain extent stock prices are determined by investor confidence but that ...
Why would a company do this?...
Stocks Trading Signals
Investors who treat trading as a full-time job h...
Stocks Vs Bonds
Bonds always carry the risk that the principal amount may not...
Stocks Vs Mutual Funds
What is the advantage of a diversified portfolio? It offers protection agains...
Stock Trading Strategies
HedgingHedging is a way of protecting an investment by red...
The basis for technical analysis is the belief that stock prices move in predictable patterns. All...
Technical Analysis 2
Types Of Trading
The stock market also provides opportunities for short-term investors. Market skittishness can cause prices to fluctua...