Recently in this blog, we’ve addressed the topic of general stock market tips that were intended to help new investors come to terms with some of the myths and rumours that dominate the market, as well as to avoid some typical mistakes that often spell the downfall of first time investors. Having addressed a sufficient amount of those, however, it’s time to move on to some more specific topics. In particular, we’re going to begin to discuss the different strategies that are normally employed for choosing winning stocks and comment on the pros and cons of each one.
Having it all figured out
Everyone out there seems to have it all figured out when it comes to the market. They all think they have the sure-fire formula for picking up on the next big thing and hitting it big all with one well placed investment. The truth is, of course, that no one can accurately predict the future all of the time. If they could, there wouldn’t be any fun in playing the market!
As one plays the market and grows accustomed to its ups and downs, one can’t help but to begin to see patterns. This is just the nature of the phenomenal (and shortcut-loving) human mind at work. Everyone develops their own strategies. Be that as it may, there are certain strategies that have risen to the forefront and tend to be seized upon as “sound strategies” by a majority of individuals.
Fundamental analysis
The first of these, and the most important is the concept of “fundamental analysis”. Simply put, this is, of course, the analysis of the fundamentals of a company. But what exactly does that mean? The main theory here is that stocks tend to have a “real value” which is separate from the nominal value that it is being traded at on the market.
This “real value” is determined by looking at a number of factors, including the projected future cash flows of the company in question (the same thing you would look at when buying a company outright, which in a very real sense, is what stock trading is all about), as well as how fast it will generate the profit it seems to be ready to generate, and what that passage of time means in terms of inflation.
Differing schools of thought
Phew. It’s a lot to think about, and maybe that’s why there’s so many competing schools of thought on how best to determine what the real value of a company is. Those differing schools of thought are what we’re going to be discussing over the next several posts in this blog.
Until then, happy trading!
See you next week for part 2 of Stock Picking Strategies.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2008
{ 8 comments… read them below or add one }
This should prove to be an interesting section
Hi Grahame
I’ve got a whole set of these coming for the next 10 – 12 weeks. Then I’ll look to take it even further into more advanced strategies and ideas.
Thanks for sharing these strategies, looking foward to the next ones.
I wonder how long traditional brokers will be around with all of the online options for people.
No idea on that one Dennis. Online business has been taking clients from traditional business for a long time now and it doesn’t appear to be slowing down.
This looks like a very interesting blog Sean – I’m looking forward to reading more about Stock Picking Strategies
Hi Sean,
I’m really interested to learn more about fundamental analysis. I’m sure I read somewhere earlier that this is the method that Warren Buffet uses to pick his stocks. So, it has to be good.
I also think this is where the advice you gave about sticking to what you know is important. You’re more likely to know and understand what’s going on with the companies in your own industry.
When it comes to fundamental analysis, I prefer to learn from a mentor as I find it much easier to learn.
Fundamental analysis can be overwhelming as there are so many significant things to consider and you need to know how to read the statistics.