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Let’s Talk Stock Market Fundamentals 1

Technical Analysis has become extremely popular over the past decade. Modern day computers and the Internet have allowed everyone from professional traders to arm-chair investors study the markets live and make their trading decisions instantly.

Despite the technological advancements and the “New found power of Technical Analysis” we must not forget the traditional approach to investing, that is Fundamental Analysis.

Before computers made charting child’s play, professional investors and brokers would study the fundamentals of a company. They would study the balance sheets, the forecasts, and the past performance. They would investigate the board of directors, attend the general meetings and really try to get a “feel” for the company. Because back then, just like today, the market always rewarded Earnings, or Profits. A company’s whole mission in life is to make profits. If the company can continue to make and grow it’s profits, the share price will rise. A company like that may well get stung in times of high market volatility, but those with strong earnings will always fall the least and recover the quickest.

Fundamental analysis is essentially the study of a company’s earnings. Up until recently, however, fundamental analysis was extremely time consuming, and hence, not as popular by private investors.

For most investors these days, time is a precious commodity, and they simply don’t have enough of it to spend investigating the thousands of companies that are out there. Fortunately, there are now a variety of web sites which cater to fundamental information. The best sites are those which provide search engines. These search engines allow you to program the desired fundamental information and parameters you are looking for and then will conduct the search for you, usually within seconds!

The key is to know what to look for!

You may well have heard of a variety of fundamental terms and ratios. They usually get thrown around at dinner parties by those who are trying to sound impressive, or at least semi-intelligent.

Terms such as P/E ratio, PEG ratio, EPS (earnings per share) and Current ratio are usually foreign to most people, yet they tend to knod knowingly when discussing the topic with their friends.

Well, as it is, these particular calculations are extremely useful, especially when used to find shares in the market that represent great value. Now, there are many more calculations to consider, and we will investigate them in future issues of this report. But to begin, let’s look at a few now.

As mentioned, earnings, or profits, are extremely important for a public company (or any company for that matter). Revenue, or income, is sometimes confused with earnings. Many companies have enormous revenues, but fail to make any profit. Even a school child would know that that is an unsustainable situation.

Earnings per share (EPS)

One way to identify potential share investment opportunities is to study the earnings track record of a company. We want to see how profitable have they been over the course of the past two years. Now the past does not always equal the future, but it gives us a good idea as to how well management has performed over the past couple of years, how well have their products or services sold over the past couple of years. So, we want to look 2 years in the past and see how earnings have grown if they’ve grown at all.

We only want to be investing in companies whose earnings are increasing and have grown in excess of 15% per year.

In other words, if their earnings were $1 a share 2 years ago, we want to see last year’s earnings up to $1.15 and this year’s earnings up another 15%.

When you find companies whose earnings are going up at least 15%, you are finding the cream of the crop, because most companies are not able to sustain that level of growth or profit growth over a period of time.

In future issues we’ll continue to outline exactly what to look for when searching for the best share investment opportunities.

Seed Newsvine

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