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Stock Market Trading

Stock Market Trading

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Published by bothernolonger
a book about the stock market
a book about the stock market

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Published by: bothernolonger on Dec 06, 2012
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12/02/2013

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Let’s take a look at the definition of fundamental analysis:

"Fundamental stock analysis requires, among other things, a
close examination of the financial statements for the company to
determine its current financial strength, future growth and prof-
itability prospects, and current management skills, in order to
estimate whether the stock's price is undervalued or overvalued.
A good deal of reliance is placed on annual and quarterly earn-
ings reports, the economic, political and competitive environ-
ment facing the company, as well as any current news items or
rumors relating to the company's operations."

Source: www.daytrading.about.com

In other words, fundamental analysis is the study of basic, underlying
factors that affect the supply and demand of the contracts which are be-

80

Step 3: Selecting a Trading Approach

ing traded. Fundamental analysis looks at the CAUSE of market move-
ment.

In the following graph, you’ll find a snapshot of some “key statistics” for
IBM. In addition to this company-specific data, you need to take the
overall economic environment into consideration and start looking at
various macroeconomic indicators, such as economic growth rates, inter-
est rates, inflation rates, and unemployment rates.

As an example, interest rate hikes are seldom good news for stock mar-
kets. This is due to the fact that many investors will withdraw money
from a country's stock market when there is a hike of interest rates,
causing the country's currency to weaken.

Knowing which effect prevails can be tricky. When the Fed announced
an interest rate cut in December of 2007, the Dow Jones Index dropped
300 points. When the Fed cut interest rates in January of 2008, the Dow
Jones Index jumped 200 points up.

In addition, economic reports with key data like the PPI, CPI, PMI, GDP,
and, recently, even housing statistics, have proven to have a significant
impact on the stock market.

Confused?

If the abbreviations and the “key statistics” on the following graph don’t
make sense to you, or if they confuse you, then you are not alone.

Fundamental analysis is not easy. That’s why most market analysts have
some background in economics, both macro- and microeconomics. Big
trading companies like Goldman Sachs are employing analysts with
Ph.D.s in economics, and you shouldn’t try to compete with them.

Even if you decide NOT to trade stocks and want to focus on futures or
the forex market, then you still need to take a look at crop and weather
reports (if you are trading grain futures), interest rates and the country’s
economic data (if you are trading forex), or follow developments in the
Middle East and the status of the pipelines and refineries all over the
world (if you are trading energy futures).

81

The Complete Guide to Day Trading

82

Step 3: Selecting a Trading Approach

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