What to Look for Before Purchasing Stock Technicals
Support levels, micro(15,30,1hr,4hr) and macro(daily,weekly, monthly, yearly).
Resistance levels, micro and macro(same as above).
Trend(is it bullish, bearish or currently consolidating)?
• Make sure to look at micro and macro scales
Mental stoploss (should be near the bottom support level on the trend that you are looking at).
Candlesticks (what are they telling you?)
Volume(is there alot of liquid in the stock?)
Float(how many shares are available to trade of that stock?)
Short intrest(how many shares are soldshort, is a shortsqueeze possible, why/why not?)
Moving averages(where is the stock in relation to these averages?)
RSI (is it overbought or oversold?)
Patterns (do you notice any bullish or bearish patterns?)
Fundamentals – can be found at finviz.com 1.PricetoEarningsRatio(P/E)
• Use within same sector to compare companies, compare it to the average PE of the sector
• “What you pay for 1$ of company earnings”
• Want the PE BELOW sector average.
- Price to Book Ratio(P/B)
• If the PB is less or equal to 1 (1>x), the stock is trading at/below the value of its assets.
• If the PB is greater than or equal to 1 (1<x), the stock is trading at/above the value of its assets.
• Use this to compare companies within the same sector
• Current share value ($) / (equity/share)
- Price to Earnings to Growth(PEG)
• Good to use on a company with rapid growth
• If PEG is less than or equal to 1 (1>x), company is undervalued.
• If PEG is greater than or equal to 1 (1<x), the company might be overvalued.
- Return of Equity (ROE)
• “how well a company generates earnings”
• 17-20% = very good
• 20-25% = excellent
• 25%+ = superior
- Debt to Equity Ratio
• Try to avoid companies that have a ratio greater than 2.
- Current Ratio
• “the ability to pay short term and long term debt”
• x>1 = liability > assets
• x<1 = liability < assets
• x>3 = holding back
- SEC Filings
• File 4 = acquired/disposed of shares by insiders
• File 8/10K, looking for management optimistic/bullish
- IncomeStatement (Revenues & Expenses,P&L)
• Revenue = driven by price and quantity of the product sold.
• Costs of goods sold = price of labor, materials, etc.
• General and Administrative Costs = price of sales people, utilities or rent).
• that takes you down to operating profit or EBIT
• from there you subtract out your interest expenses (amount of interest you pay for debt) and your taxes (companies have an effective tax rate) to get to your ‘Net Income’
• Financial institutions like to look at a metric called EBITDA (Earnings before Interest, Taxes, Depreciation & Amortization) which is a semi proxy for free cash flow
• its essentially your operating earnings adding back Depreciation and Amortization which are non cash expenses
• Depreciation (think of buildings, you have a building worth $100 and you depreciate it over 5 years so goes down by $20 every year but its not a true expense so you add it back
• Amortization is for intangibles think like Intellectual Property
- BalanceSheet(Financial position at a given point in time)
• Balance Sheet (financial position at point in time). Assets = Liabilities + Owner’s Equity
• That’s the very definition
• On the Assets side, you have Cash and equivalents (could be short-term treasuries that you can convert to cash pretty quickly usually within a year), Accounts Receivable (what a client owes you in credit), Inventory, PP&E (think like machinery for industrial companies). Liabilities is primarily A/P (what you owe ), Debt, both short and long term among others
• then Owner’s equity is Common Stock, Retained Earnings (Net Income – Dividends paid to date) flows from Net Income on income statement
- Cash Flow Statement(cash flow from operations, financing and operations)
• Cash Flow Statement, 3 main ones are Cash Flow from Operations (pretty straightforward what this means, day-to-day cash outflows/inflows)
• Cash Flow from Investing (CapEX is the big one here, represents purchase and sale of equipment, plant, properties, etc.) also outflows from acquisitions or inflows from sales show up here • Cash Flow from Financing is how the company raises money, you issue stock, you issue debt, and you get money
• companies can also repurchase their stock to lower number of shares outstanding, shows confidence in the stock
Disclaimer: Consult your financial professional before making any investment decision.