Understanding Stock Trading Fundamental Analysis Tutorial
In this video Veronica from Zecco Zirens will try to teach you the basics of Fundamental Analysis. This is the most common method to evaluate a company stock potential. You can buy a stock because your aunt said to, but sometimes it is a good idea to get more technical than that. Fundamental Analysis is nothing more than checking in the general health of a company. Fundamental Analysis grabs a number of facts from a company, compares those facts with your outlook and the stocks real price and suggests to buy or to sell.
Everybody has its own magic formula on Fundamental Analysis so she is going to simplify it and use some common metrics used by star investors like Warren Buffett and his mentor Benjamin Graham. Here are three fundamental variables you can use to check a company. The most common is earnings. That is because long term earnings drive stock prices. So you want to start by looking for historical growth of that company. The longer, the better. Any company can get lucky and get earnings for a couple of years. But if you find one that has consistently growing earnings for five or ten years, that is a sign of solid management.
Second, just because a company has done well in the past does not mean that the future will be as well. So we have to estimate their future earnings growth. To judge value, you have to look for companies with relatively low prices to earnings growth ratio. Finally, you want to look for a company with a strong return on equity. This is a good measure on how well the management is going to use the cash we are going to give them. Are they going to reinvest it wisely in the company? A return on equity over 15% is a common benchmark. This is it. If you use these three principles you will have a great start with the Fundamental Analysis. Just a little warning: Once you get started, you may get addicted. There are also other metrics that you can use: Price to Book Ratio, Cash Flow and Dividend Growth.