Technical Analysis vs. Fundamental Analysis

Fundamental analysis look for a inconsistency between essential and market price -- that is, trying to buy stock that is being sold for less than it is worth. Intrinsic value is the actual value that you believe a stock to have, regardless of what it is being bought and sold for on the market. Individuals who are more comfortable with fundamental strategies use a wide array of economic, industry and corporate information to calculate the corporation's "intrinsic value." If you determine that the intrinsic value of the corporation's stock is more than its market value, it is said that a buy opportunity has presented itself.

As fundamental analysis puts importance on various of the factors underlying the price of stocks, technical analysis tends to focus on outcome data, such as the stock price itself and stock trading volume. Technical analysts believe that the stock price and other measures such as volume behave in patterns that can then be used to anticipate future price directions. Technical analysis seeks to detect patterns and discrepancies in the way the market functions in order to be able to make educated guesses about certain stocks. Technical analysts hope to "predict" market moves in order to take advantage of them quickly.

While neither come up to has proved to be superior, if you apply a consistent strategy, you will attain your goal more often than if you had no strategy at all. In other words, a necessary element for investment success is a consistent strategy based on sound principles.

Mining Annual Reports and Financial Statements for Information

• The annual report is a convenient way for the corporation to put its best foot forward. If you want to learn more about a company, this is a very good place to start. But if you've tracked the company for a while and already understand what it does and what it plans to do, you can skip all of the flashy public relations sections and go to the back of the annual report, which is where the financial statements appear.

• The balance sheet is a snapshot of a company's assets and liabilities. It helps you answer such questions as how much cash the company has available, how much debt it has assumed and how much the corporation's net worth is.

• The income statement reports revenue, expense and net income for a defined period of time. It provides answers to questions regarding the company's net income and will explain how this will affect the budget.

• The cash flow statement, in conjunction with the income statement, tells you if the company is making money. Net losses on the income statement aren't necessarily bad. Net cash outflow on the cash flow statement isn't necessarily bad. A combination of the two for an extended period of time, however, spells doom for any company.

• The analysis of financial statements relies on accounting data.

Accounting data and Ratios: Measuring the Company Pulse

How can you use the information from the financial statements to help you invest wisely? By comparing numbers to each other by means of ratios. These ratios can help you compare the company with its competitors or with its own performance in prior years. All measures should be compared with five to 10 years of historic data and with industry averages to detect if any trends to the information are present.

Profitability

• After-Tax Net Income and Net Income Per Share (after-tax net income/number of common stock shares outstanding): For corporations with seasonal business -- a predictable ebb and flow in revenues that's tied to changes in climate, holidays and vacations -- be sure to compare the same quarters across the years.

• Return On Assets (after-tax net operating income/total assets): Operating income is income earned from doing business, not the sale of assets or investment returns. This ratio is directly related to the productivity of assets, and a low ratio suggests that the company's assets have not been well managed.

• Asset Turnover (revenue/total assets): This ratio is the amount of assets the company needed in order to generate a dollar of sales.

Liquidity

• Debt to Equity (long-term debt/total equity -- current liabilities): This measures whether the corporation can satisfy its obligations to its creditors. Long-term debt shouldn't include accruals or accounts payable. It should only be IOUs that the company owes a bank, or has issued publicly to investors. Long-term debt will usually be labeled "Long Term Debt." Equity should be total stockholders' equity. The higher this ratio, the more this company relies on debt. A higher number isn't necessarily bad, but should be able to be rationally explained. If the replacement will help the company make a profit in the future, then the debt isn't so bad.

• Current Ratio (current assets/current liabilities): This ratio measures the corporation's ability to fund its current liabilities, such as day-to-day operating expenses and short-term debt. Companies with dependable cash flows can more safely maintain lower current ratios than companies without.

• Quick Ratio (cash + marketable securities + accounts receivable / current liabilities): Marketable securities are simply investments that the company has made in other companies. Marketable securities must be easily marketed, or converted into cash. So this ratio lets you evaluate at a glance how a company would fare if sales stopped. It compares cash and cash equivalents -- such as investments and sales that have been made but not converted to cash -- to current liabilities in order to measure the company's capacity to pay its current obligations and to fund its day-to-day operations.