An Introduction To Fundamental Stock Picking

Let me tell you, there are no shortage of ways to pick out winning investments & stocks in the global markets. The one thing that practically all successful investors have in common is their thirst for knowledge & information of the markets they “trade” in, and the use of a “system” that they follow.

The aim of this article is to try and arm you with some vital information that you must know before even attempting to trade or invest in stocks for the first time. As good as this information is, due to the vastness of this topic (i.e. trading & investing in stocks) you must continue to invest in your education even after reading it. The more knowledge you are armed with, the better your chances of picking a high performing portfolio of stocks that can beat the market. The true masters of investment and trading never ever stop learning – they are intoxicated by the market and are constantly seeking out ways to improve their returns through further education!

Let’s begin by understanding what we mean by “fundamental analysis”.

Fundamental analysis looks at the underlying financials, facts and figures of a company in order to determine it’s potential performance in the stock market. In addition to the basic profitability of the company, fundamental analysis delves into additional factors such as its gearing (loans payable), cash-flow and asset value. Fundamental analysis uses some key ratios that we will look at later in order to judge the company in relation to its stock price.

You may have heard or seen statements such as those below from various financial media:

· AAA company announced increased earnings in its 4th quarter.
· Earnings Per Share for BBB have slipped again in its last financial year.
· The Price/Earnings (PE) ratio for CCC are far lower than the industry average.

All of these are examples of fundamental analysis in motion. Before long you’ll be able to understand exactly what those high-paid analysts are talking about, and how the prices for the stocks they mention will move accordingly.

While knowledge of fundamental investing is critical to any budding investor, this type of analysis is not a good way to enter/exit trades (i.e. we do not use this to time our entry or exit to trades). Timing stocks (knowing the ideal time to buy and sell them) is covered by another type of analysis called Technical Analysis (beyond the scope of this article). Technical analysis uses charts and graphs in order to determine when the best entry and exit points to a stock may be.

Note that some investors rely solely on fundamental analysis (often longer term investors) while others rely purely on technical analysis. The ultimate investor is able to use both in order to pick out perfect stocks that have great underlying profitability or value and then use technical analysis to time their entry (purchase).