Understanding The Stock Market

Stock Market For Beginners: Selecting Stocks

Choosing a profitable stock is not as easy as many would like to believe. It does depend upon how long you want to wait. Therefore, a day trader would hold a different opinion of the best stocks to buy than a long-term investor. If you are looking for information on the stock market for beginners, this article should help you decide how to choose stocks.

People look for earnings per share as one of the ratios. In the same class is the return on capital employed. A comparison of these ratios with others in the same industry would give an idea whether or not the stock is profitable enough. This is then followed by analysis of the growth rate of earnings per share. A steady record indicates that the management has established a decent balance between profitability and pricing. Annual increase in sales is one indication of the growth of the company. Investors should examine whether this increase in turnover is achieved by selling more, or increasing the price. Again, comparing with other peers, and past performance would indicate in which direction the stocks are likely to go. Debts are to be feared, even at corporate levels, but not always.

If a business is expanding, which it must to keep its market share then it does need to borrow. Borrowing from shareholders seems cheap for the moment, but it is in fact a promise of higher return forever! So many times, managements prefer borrowing from sources like banks, or financial institutions, which are repayable within shorter term. The extent of such borrowings, and the amount of liquid cash leaving to serve this debt becomes crucial. If substantial amount of money leaves the regular cash flow, there is every possibility that the business would have working capital problems, and therefore, be forced to wind up.

Likewise, the quantum of inventories, and outstanding amounts are also crucial. Though inventories have to increase in proportion to growing sales, excessive monies blocked in inventories, and debtors may mean the business has to be borrow at higher interest rates for its working capital requirement. Therefore liquidity ratio is crucial. But a new business is unlikely to have such record. There are other factors such as policies of the governments, new contracts, terms and conditions in the new contract, political relations with country to which goods are exported, or country from which raw materials are imported, foreign exchange fluctuations, etc.

For selecting the right stock to invest in and understanding the stock market, a day trader would obviously look for news relating factors like government policies, new contracts, trends abroad, etc. Short term and medium term investors could look at advance tax amounts paid by the company and extrapolate the profitability comparing this data to previous quarters data, and the same quarter in the previous year. Likewise, they can look at stocks that have slipped almost 50 percent or so during bear hammering. Long-term investors could also buy such stocks that have been beaten down because these stocks would have been the stocks that market fancied, before the bears took over. Obviously, some of these stocks would have fallen way below their valuations. Entering stock markets during bear phase is the right thing to do for medium term and long term investors.

Especially when the bear phase has just started. This does not mean that there are no opportunities when stock markets are in bull phase. List of top traded stocks on NYSE, NASDAQ, and AMEX give an indication which stocks are forming new bases. Volumes indicate the price band where the stock is likely to find resistance. If many people buy stock at a particular price then they would try to hold the stock at that level, or be willing to absorb slight loss, if and when the stocks slip. That should give a reasonable opportunity to the investor to quit if the stock prices do not go in the northern direction.

Because many investors on stock markets are not aware of various aspects relating to pricing, they obviously start coming in when the markets are at much higher level. They invest without really discriminating, adding to the froth, because of which analysts too can go wrong. For a new investor following the indexes that established stock market business houses like Standards and Poor develop might help. Investor should remember not to panic, as that does cause quite a bit of loss. Some deals will be bad. So spreading risk across a larger portfolio would help. Investing at the start of the day is best avoided. Let the stock market absorb the news of previous day. Some froth would definitely come, which the analysts would discount, and start selling. Soon a realistic level would be reached. That would take about an hour or two. That would be the ideal time to view whether the stock is really priced reasonably, and whether it would be going anywhere from there.

Of course, even with this strategy, there would be chances of missing on some profitable stocks. But possibility of making losses would be lower. Derivatives like options would certainly be a better way to play the stock markets as stock markets react excessively. They might punish even a profitable stock based on trends and market fancy. Dialysis Corporation of America, Trico Marine Services, Inc., Royal Bancshares of Pennsylvania, Inc., and Point.360 were the stock that gained substantially. It is unlikely that they would continue in that trajectory. So when they taper a bit, picking them up would be advisable.

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Reading Stock Charts – The Basics

When you first take a look at a stock chart, the information you find may a bit overwhelming.  Sure, it kind of looks like the same type of graph you’ve seen since 2nd grade, but what does everything mean?  To truly understand your investment portfolio, you need to learn how to read stock charts.

If you’re looking at the stock charts in your local newspaper, the type of chart you’ll typically see there is a line chart.  This chart simply takes the closing price for each day and connects them in a straight line.  On the right hand side of the chart you will see numbers that correspond with the price of the stock.  These prices usually are broken down to the penny, so if you’re stock has closed at $10, you will see the line’s last point at 10.00.  If your stock raises a dollar in price, to 11.00, it is said to have raised a point.  On the stock market, a point is equal to $1, or 100 pennies.  On the bottom of the chart you’ll find the date.  So that means a stock chart is plotted as time vs. price.

If you’re looking at time-frames shorter than a day, typically used for short-term trading, the time on the bottom of the chart will be broken down into smaller increments.  They can be as small as 1 minute (typically used for day trading stock charts), or as large as 4 hours (which is frequently used when trading the Foreign Exchange).  By using these small time-frame charts, traders attempt to capitalize on the fluctuations a stock goes through during the trading day.  If you’re looking at stock only on a daily basis, you may only see small shifts in the price, but a stock can move several points up or down during the day, only to bounce back to being very close to its opening price.  Line charts are not very useful in this capacity, so either a bar chart, or a candlestick chart is used.  Both of these types of charts display either a bar, or candlestick per unit of time.  These bars/candlesticks show the highs & lows as well as the opens & closes.  This is much more useful when day trading or swing trading, because it gives a bit more insight into the stock’s past, and potential future movements.

That pretty much sums up the basics of reading a stock chart.  To begin to be able to use this information for your investments, you’ll have to look into technical analysis.  Technical analysis is the study of a stock’s data, including its charts, to understand past movements, and attempt to predict future movements.

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