Market Beat: Stock market analysis
Stock market analysis can be separated into a few different methods. One is known as fundamental analysis and it consists of studying a stock’s financial reports and considering its valuations.
One of the most common metrics is the price to earnings ratio or PE. It is calculated by simply dividing the price of the stock by its earnings per share. The price to book ratio is another, it is determined by dividing the price of the stock by the book value of the company.
The price to sales ratio can be found by dividing the price by sales. Price to cash flow and especially free cash flow can be useful for dividend paying stocks to determine if they have adequate cash to continue their dividend payment. Free cash flow is the amount of cash a company has after its obligations are met.
Technical analysis is done by studying a stock’s past price movement. Stock charts are widely used by investors. There are three basic types of charting techniques; bar charts, point and figure charts and candlestick charts.
Bar charts are probably the most common and can be used over various time frames. The horizontal axis is the time and the vertical axis is the price. Daily charts are used widely. The bar for a given day will have the opening price for that day, the closing price and the high and low price of the day. A wide variety of analytical tools can be used on bar charts, like moving averages, and a host of other technical indicators that have been developed by strategists over the years. It’s simple to look at a stock’s chart to determine what direction its price has been trending.
Point and figure charts use Xs and Os to show whether the stock’s price is rising or falling. There is no time frame on point and figure charts. If a stock is rising, there will be a column of X’s and there will be a column of Os if it’s falling.
Japanese candlesticks have been around since the 17th century when early Japanese commodity traders used them to track prices of commodities like rice. The candlestick will show the opening, closing and high and low values of the underlying instrument over the time frame that is selected.
Another type of analysis that is becoming even more prevalent in this age of artificial intelligence and super computers today is statistical analysis.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.