The secret to making money in the Stock Market is very simple.  It is the same philosophy that has been used for thousands of years in trading and sales.  BUY LOW, SELL HIGH. 

As I said the theory is very simple.  When viewing a “HISTORICAL” chart, the times to buy and sell are obvious.  But the reality of the situation is that we are trying to make decisions on future events.  Sort of like picking winning lottery numbers.  The difference being that stocks are based on businesses which have some logic to their ups and downs, and are not just random luck.  (Not that a bit of  luck isn’t helpful when dealing with business and stocks.)  The more that we know about a stock, a business, a sector, and their history, increases our “LUCK”.  It also proportionately decreases our “RISK”.  With all of this uncertainty, how do we use our Crystal Ball to gaze into the future so that we know what Stock to buy?

                                                                         Picking Stocks with a Crystal Ball

This is not the method I would choose.  Throwing darts at the stock page and picking names that you like are equally as bad.  (Yes I have actually tried them)  To limit your “RISK” you will have to do some home work.

There are three basic ways to pick Stocks.  They are Fundamental Analysis, Technical Analysis, and Combination Analysis.  I would recommend the third method.  I use Combination Analysis for picking my stocks.  I use Fundamental Analysis to pick the Stock and then I use Technical Analysis to decide when to buy and sell that Stock.  This combined method has worked out pretty good.  But remember there are no grantees when it come to stocks. 

Fundamental Analysis is looking at the FINANCIAL side of the business.  What are the ASSETS?  What are the LIABILITIES?  What is the Book Value of the company’s Stock?  What are their Sales prospects for next year?  What is the Margin they are working on?  What is their Debt Load?  What are their competitors doing?  These are the kinds of Accounting type questions that a Fundamental Analyst would ask in determining the value of a Company’s Stock.  Most of this information is available in the research section of your trading platform.  If it is not you may need to change platforms.

“Fundamental analysis maintains that markets may mis-price a security in the short run but that the “correct” price will eventually be reached. Profits can be made by trading the mis-priced security and then waiting for the market to recognize its “mistake” and reprice the security.” (Definition from Wikipedia.) 

Technical Analysts wouldn’t be that concerned about the company’s books, because they are more interested in how the stock is doing technically.  Is it in an Up Trend or Down Trend?   Where is it today compared to the 20 and 200 day Moving Averages?  What is the RSI showing?  What is the volume telling me? Is there a Hammer Candlestick at the base of a Down Trend or the top or an Up Trend.  Is this a Bullish Engulfing Pattern?  These are the type of questions a Technical Analyst would ask.

“Technical Analysis maintains that all information is reflected already in the stock price. Trends ‘are your friend’ and sentiment changes predate and predict trend changes. Investors’ emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the ‘value’ of a stock is. Their price predictions are only extrapolations from historical price patterns.”  (Definition from Wikipedia.)

What that meant in English is that the price of many stocks, especially today, is based more on the perceptions of the market, and not the bookkeeping.  I have found that to be very true.  A company reports a 25% rise in profit, yet next day the stock drops.  That is definitely not what you would expect.

Which one is better???  I personally think that both systems have merritt.  Using the best of  both of these systems makes sense to me.  That is why I recommend the Combination Analysis Method.  If I am looking at a particular Stock I would definitely check the company’s financials, which can be found on SEDAR for Canadian Companies and EDGAR for US listed Companies.  By the way this information is FREE. This would allow me to assess if they are really a viable company and allow me to answer basic Fundamental Accounting questions.  Then I would check the charts and do some Technical Analysis, to see if now is the right time to buy the stock.  I might be looking at it too soon (before it hits bottom), or, I may have missed the boat and it is ready to head down again.

I have one other source that I use for Canadian Stocks; the INK Insider Reports.  These reports look at what a company’s Insiders (CEO, CFO, Directors, Officers, and 10% or more Holders) are doing.  Even if the Financial Statement for the last quarter is OK, and the charts say it might go up, if the Insiders are selling, I will think twice before buying.  In most cases, nobody knows more about what is going to happen in the future than the “Insiders” of the company.

Determining what Stock to buy should be a decision based on knowledge.  You should know a company’s Financial health, the perception of the markets, and the actions of the “Insiders”.  That is why I favour the Combination Method of Analysis.  It’s a lot more work and effort than throwing a dart, but it sure cuts down the RISK. That is a key factor when your a Micro Investor.

Keep Learning:

Uncle E