Stock Trading For Beginners

Okay so in my last article, I couldn't embed the video on how trading works so I'm embedding it here:

In part II I will be introducing you to technical analysis. Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Unlike fundamental analysis which I will talk about later.

Technical analysis is useful with any security with historical trading data such as, stocks, futures, commodities, fixed income, currencies, and other securities.

Now, I'm not going to give you the full history of technical analysis, just the basics. Technical analysis tries to understand the market sentiment behind the price trends through patterns and trends.

There are three general assumptions in technical analysis. First, all factors effecting the market are already factored into the price. Second, prices will exhibit trends regardless of the time frame being observed. Third, history tends to repeat itself due to the repetitive nature of market psychology.

In general, technical analysts look at these four categories of indicators

• Volume
• Momentum
• Trends
• Volatility

Remember, knowledge is key when it comes to making profitable trades. It's best to familiarize yourself with the different types of indicators, even if you have a winning strategy. The reason why is because market conditions do not stay the same forever and your current strategy can become obsolete. With that established, let's take a look at fundamental analysis.

Fundamental analysis is a measure of a security's value via economic and financial factors. The goal is for investor's to derive a number that can be compared to the security's price and used to gauge whether or not a stock is undervalued or overvalued.

Analysts will typically study the overall strength of the economy and then the strength of the specific industry before concentrating on the individual company performance in order to arrive at the fair market value for the security. This is done using public data to evaluate the value of the security. For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors such as interest rates and the overall state of the economy, then studying information about the bond issuer, such as potential changes in its credit rating. For stocks, fundamental analysis uses revenues, earnings, future growth, return on equity, profit margins, and other data to determine a company's underlying value and potential for future growth.

If an analyst calculates that the stock's value should be significantly higher than the stock's current market price, they may publish a buy or overweight rating for the stock. This acts as a recommendation to investors who follow that analyst. If the analyst calculates a lower intrinsic value than the current market price, the stock is considered overvalued and a sell or underweight recommendation is issued.

Fundamental analysis can be further broken down into qualitative and quantitative analysis.

Quantitative fundamentals are hard numbers. They are the measurable characteristics of a business. That's why the biggest source of quantitative data is financial statements. Revenue, profit, assets, and more can be measured with great precision.

The qualitative fundamentals are less tangible. They might include the quality of a company's key executives, its brand-name recognition, patents, and proprietary technology.

There are four key fundamentals that analysts always consider when regarding a company. All are qualitative rather than quantitative. They include:

• The Business Model
• Competitive Advantage
• Management
• Corporate Governance

Followers of fundamental analysis use quantitative information gleaned from financial statements to make investment decisions. The three most important financial statements are income statements, balance sheets, and cash flow statements.