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Wealth Waves: How to Pick a Single Stock
Unveiling the Secrets of Stock Analysis
Alex John
July 27, 2024
In partnership with
Hi there,
Ever wondered how to pick the right stock to invest in? Let me share a story that might inspire you and provide some valuable insights.
When I was just a newborn, my grandmother gifted me a certificate for a single share of Disney stock, priced at $1.40. Decades later, through stock splits and dividend reinvestments, that single share had grown into over 50 shares, each worth about $35. In 2007, we sold the shares for around $1,600, which we used as part of the down payment on our first house. That was a whopping 114,100% return on investment!
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Understanding the stock market isn’t just about luck. It involves a combination of strategic analyses. Let's dive into the two primary methods of stock analysis: Technical Analysis and Fundamental Analysis.
Technical Analysis: The Technician's Approach
What it is:
Technical analysis focuses on the price movements and trading volumes of a stock. It uses historical data to identify patterns and trends that can indicate future performance.
Key Concepts:
- Price Movements: Observing historical price data to identify trends.
- Trading Volume: Analyzing the volume of traded shares to gauge interest and momentum.
- Patterns: Recognizing recurring patterns such as the cup and handle, candlesticks, and the falling knife.
Example Patterns:
- Cup and Handle:
- Candlesticks:
- Moving Average:
This is a constantly updating average price of a stock over a specific period. One classic use is the crossover strategy, which looks for the share price to cross above or below the moving average, signaling a buy or sell opportunity.
Fundamental Analysis: The Fundamentalist's Approach
What it is:
Fundamental analysis evaluates a company's overall financial health and market position. It examines financial statements, management quality, and industry conditions to determine the stock's intrinsic value.
Key Concepts:
- Earnings Per Share (EPS):
EPS is calculated by taking the company's net income, subtracting preferred dividends, and dividing by the number of outstanding shares. A higher EPS indicates higher profitability.
- Price-to-Earnings Ratio (P/E):
The P/E ratio is found by dividing the current stock price by the EPS. It helps compare the valuation of different companies.
Qualitative Elements:
Fundamental analysis also considers qualitative factors like:
- Competitive Advantage: Does the company have a unique edge over competitors?
- Management Quality: Is the company led by capable and ethical managers?
- Industry Trends: What direction is the industry heading?
Combining Both Analyses
While technical analysis provides insights into short-term trading opportunities, fundamental analysis offers a long-term view of a company's value. Combining both methods can give you a comprehensive understanding of a stock's potential.
Even Warren Buffett uses a multi-faceted approach: he looks for good returns on tangible capital, capable management, and sensible pricing.
Final Thoughts
Investing in the stock market is about becoming a more informed and confident investor. Whether you prefer the technical squiggly lines or the fundamental financial statements, both methods have their merits. Start small, do your own research, and remember, the goal is not to be immune to losses but to make informed decisions.
Thank you for reading, and happy investing!
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Master the market in 5 minutes per day
Hot stock alerts sent directly to your phone
150,000+ active subscribers and growing fast!