How to value a company?
Valuing stocks is a difficult task. If it was easy, everybody would make millions. Companies are subject to many factors:
- Global events
- Local events
- The quality of products they produce
- The amount of debt
- How the competition is performing
- And many more
Even a small change in one of things mentioned above can make or break a company. A global event like covid-19 destroyed many businesses that were very healthy before the outbreak. Politics can cause disruptions in doing business with other countries. Employees that are not treated the way they should can cause a public resentment and stocks plummeting. A change of ingredient because it’s cheaper can cause a bad quality product people don’t like anymore. Wrong leadership by thinking the business does not need a website or webhop has bankrupt many big companies.
It’s very hard to predict how a company will perform in the future. It’s actually impossible. Who would have known that covid-19 would cause a global halt to the financial markets and cause so many businesses to go bankrupt? Although events like this only happen once or twice in a lifetime, you’ll never know what will happen next. It makes sense to first look at how a company is performing over the years before you want to own a little piece of that company.
29.1 Fundamental analysis vs technical analysis
There is a lot of financial data companies have to make available to the public forced by law. An investor can try to interpret and use this data to determine how healthy the company actually is. This analysis is called fundamental analysis. With fundamental analysis, investors are trying to find the fair price the stock should be traded for. Based on intrinsic value, market conditions, economic conditions and many more factors.
Technical analysis is based on looking at various indicators, current price, support and resistance lines and many other patterns found in the chart. Basically meaning you are staring at the chart all day. Technical analysis is mostly used by day traders. Because day traders are trading short time frames, they have to find the edge in a small period of time. Long term investors are more likely to use fundamental analysis because they invest for the long term. But you can also use technical analysis to buy stocks.
Before buying a stock from any company, you should always do fundamental analysis first. Without doing fundamental analysis, you have no idea what you are buying. Even the best and greatest companies in the world can trade way above their actual value. That might be a good sign not to buy. This totally depends on your investing goals and used strategies. To sum up the differences:
|Fundamental analysis||Technical analysis|
|Definition||Uses economic reports and,various sources of information to determine the intrinsic value of a company with the goal of finding long term investment opportunities||Uses various amounts of indicators and other tools to determine short term buy or sell opportunities|
|Time frames||Very long, preferably data from 10 years back or more||Previous data is not that important <1 back at most.|
|Type of trader||Long term investing||Short term trading|
Beyond this point I’ll mostly talk about fundamental analysis diving into income statements and various ratios to determine the current market value of a company/stock. While technical analysis can play a big part in your investing strategy, it goes beyond the scope of this guide (it would add 75 pages). But if you want to know everything about technical analysis and how to apply this you should read the ultimate day trading guide. In this guide I’ll guide you through all kinds of indicators, support and resistance lines, trendlines, market structure, moving averages and many more.
Chapters: The Ultimate Investing Guide
- 1. Intro2. What is investing?3. What are stocks?4. Types of stocks5. Why buy stocks?6. How to buy stocks7. Store stocks8. Stock splits9. Stock quests10. What are bonds?11. Secured bonds and maturity12. How do bonds work?13. Credit rating14. Treasury bonds15. Corporate bonds16. Municipal bonds17. Agency bonds18. Bond quests19. Mutual funds20. Mutual funds earnings21. ETFs22. Why ETFs23. Index funds24. Hedge funds25. Derivatives26. Commodities27. Indices28. Overview29. Determine company value30. IPOs31. Penny stocks32. Dividends33. Financial health34. Profitability35. Operating efficiency36. Liquidity37. Solvency38. Market Evaluation39. Not only numbers40. Investing portfolio considerations41. Creating portfolio42. Buy/Sell Strategy43. Broker44. Emotions45. Final steps46. Key Concepts
How you think about this?