Chapter 1 – Essential Stock Market Knowledge – Fundamentals

Excerpt from Chapter 1 of the Liberated Stock Trader Book and accompanying Liberated Stock Trader Training Course

Fundamental Analysis – the real Positives and Negatives

Positives of Fundamental Analysis

  • Understanding macro economics can help in assessing future business climate.  The future business climate will dictate the direction of the stock market.
  • Using fundamental data provides early warnings !  On a long term view fundamentals can provide insights into the effect of Fiscal and Monetary Policy on the direction of global markets.
  • Being able to accurately value a business can help understand the gap between actual stock price and actual worth – Value Investing
  • Value Investing which is based on fundamentals alone pays well in the long term !
  • Fundamentals are the only way to determine the overall health of an economy and therefore how beneficial the climate is for doing business.
  • Understanding Industry & Sub Industry Business climates provides greater insights !
  • Easy access to analysts reports based on fundamental data.

Negatives of Fundamental Analysis

  • Grasping a full understanding of economic theory can be the work of a lifetime. Then you can still be wrong.
  • Just because you have a theory about what should happen, and it happens does not mean your theory was correct.
  • There are so many facets to economics even economists cannot agree on solid core theory.
  • To be a value investor means you need to spend a lot of time on company accounts, reports, and get close to companies.  This means the scope of company coverage is more limited.
  • Just because a company on paper is under-valued does not guarantee that its stock price will increase.
  • You could wait years for a stock price to make a significant move.  That is time wasted.

Value Investing was largely created by Benjamin Graham and detailed in his classic investment book “The Intelligent Investor”*.  Warren Buffet’s who studied the work of Graham has also an investment strategy based solidly on fundamentals.  Value investing is essentially understanding the fundamental value of a business (Assets, Liabilities, the market opportunity, the products, the cost structure, the competition) compared to the value placed on that business on Wall Street (the stock price).  The difference or the “gap” is essentially the value in Value investing.

*1 Originally released 1949, latest version recommended Collins Business; Revised edition (July 8, 2003)

Other Chapters of the Liberated Stock Trader Book are listed below

Chapter 1 – Essential Stock Market Knowledge – Fundamentals

This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and micro economics

Chapter 2 – What Really Moves Markets - Why do Booms and Busts Occur?

This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles and how to spot them.

Chapter 3 – How do markets move ? - Stock Market Cycles – Business & Economic Cycles – Kondratieff to Kuznets

What are stock market cycles and the cycles of business and economies.  Important information that you need to appreciate as part of your core analysis.

Chapter 4 – Is the Company in great shape – P/E Ratio

Next we move into fundamental analysis and the financial fitness of a company.  All the major indicators and measures are covered.

Chapter 5 – How to find the best stocks

Stock screening means using criteria to short list the kind of stock that you want to purchase.  A vital part of any stock market training

Chapter 6 – Chart Reading made easy - Japanese Candlesticks – Bullish Reversal Patterns

Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy.  The next thing to do is the technical analysis.  Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out.  This is called catching a falling knife.  This is what chart patterns and technical analysis helps with.

Chapter 7 – Trend Lines and Price Patterns - How to draw trend lines

Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend and estimate how long the trend will last.  Vital for you to establish buy and sell signals.

Chapter 8 – Chart Indicators are your friends ! – ROC Rate of Change Indicator

Which indicators should you use, there are literally hundreds of stock chart indicators.  Each have a specific use case and application, which should you use?

Chapter 9 – Chart Indicators Volume - The Price Volume Relationship

Volume is a vital indicator along with price.  Both of these you need to understand in granular detail, you will learn everything you need to know.

Chapter 10 - Advanced Stock Charting Techniques Parabolic SAR

Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.

Chapter 11 - Sentiment Indicators & Trading the News - How to trade the news

How are the market participants feeling?  Positive, Negative or indifferent.  Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator.  Lean how to use them to your advantage.

Chapter 12 - Trading Strategy - What type Of Investor are you?

Understanding how you want to invest, how much time you have and your time horizon.  These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you.  Then we move on to building your stock investing system, a critical element to your plan.

3 COMMENTS

  1. I think that it is impossible to trade without knowing fundamental analysis, but trade technically is much easier. Better when these two types of trading done simultaneously.

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