Fundamental analysis is the first stage of picking stocks. It studies companies key financial information from their published annual reports. Companies also normally provide quarterly reports stating their progress in reaching their targeted profits.
Traders generally look for companies that register consistent big profits and show good earnings per share growth every year when buying stocks.
Tools are available to quickly filter through thousands of companies key financial data leaving you with companies that match your criteria (the wonderful power of computers!). This is also known as stock screening.
Example
You could set a filter that reads;
- profit over last 3 years [+15%]
- EPS growth over 2 years [+5%]
- current ratio [between 1.3-2.5]
and end up with a list of companies that match the criteria, you can then save these companies in a spreadsheet for example. Often the list will be given to you in ticker symbol format such as;
MSFT
HP
GRMN
EBAY
With this list, you can copy and paste them straight into your
trading software, saving time and tedious work, (thumbs up to computers again!) to start the second stage of analysis -
technical analysis.
Fundamental analysis helps you significantly when trading shares. There's no point buying into companies that do not produce good profits as the likelihood of their share price going up is low. Its all about
stacking the odds in your favor through both stages of analysis, thus consequently greatly reducing risk.
Companies key financial information can be easily found on websites that allow you to register for free
practice accounts. For a good stock screening website I recommend
ADVFN.com, which still doesn't charge for its screening tools unlike a lot of other websites.
View explanations of company
key financial information.
