Fundamental means the core or base of something, and when it comes to stocks, the word fundamental analysis is thrown around quite often. Stock trading fundamentals involves reading into any data that is expected to impact the price of a stock. But, it doesn’t include technical analysis like reading charts to see the trading patterns. While working with stock exchanges, you should be aware of the “short and distort schemes” as any rumor can make you buy or sell stocks.
It seeks to create a fair portrait of the company by identifying its shares’ fundamental value, thereby engaging in buying or selling the said stocks based on the information. As a trader, there are a few indicators you can check when reading the company’s fundamentals.
Including cash flow statements, return on assets, does the company retain profits to fund future growth, conservative gearing, and how well does the company manage its capital to maximize the returns for shareholders.
Other key factors to check for include corporate events, stock splits, acquisitions, and reorganizations.
Below we will go over a few stock trading fundamentals you ought to pay attention to make the most out of your trades.
Watch out For Stock splits
Given that most investors are likely to buy a cheaper stock compared to an expensive one, stock splits present short-term buying opportunities since they lead to price appreciation as more investors buy into the stock. If a stock goes for $50 and splits 2 for 1, the asset’s market capitalization won’t change, but now it means the company has double the shares, each going for $25.
Even though this event doesn’t change the company’s value, it represents short buying and selling opportunities. The buying will occur pre the event since that’s when more investors will be flocking to purchase the stock hence pushing its price up and then post the event; there will be a chance to take profits through shorting. By identifying these phases correctly, you can trade-in and out of the same stock up to four times as a split trader.
Here you have to pay attention to the pre-announcement period since it’s the most critical. Once the company declares whether it’s likely to meet, exceed or even fail to meet the expected earnings, there will be a flurry of trades taking place right after such an announcement as traders look to take advantage of the short momentum from such news.
Watch out For Analyst Upgrades And Downgrades
Many analysts comment on various stocks. Traders tend to have absolute faith in the best analyst. If you find yourself on a show like mad money by Jim Cramer and the analyst upgrades or downgrades a stock, this could present a short-term trading opportunity. Remember, you have to be fast if you are to make the most of such an event.
Both analyst ratings and earning announcements play a part in momentum trading. Momentum traders are opportunists who look for news or events that are likely to cause a given stock to trade large volumes of shares either up or down, and they capitalize on it.
As a fundamental trader, you are more concerned with gaining insight into speculative events that are likely to drive the market and act on the information before others can obtain it.
Reorganizations, Acquisitions, And Takeovers
The above three play a key role in moving the stock price, and as a trader, you need to pay attention to what is going on within a company. There is an old saying that goes, buy the rumor, sell the news, and is very accurate when it comes to trading reorganizations, acquisitions, and takeovers.
Before any of the mentioned events occurs, there is usually a lot of speculation leading to the event, and then there is a decline once the event is announced. By taking advantage of the momentum that comes with speculation as rumors swirl around, you can trade-in and out of stock several times, and when the announcement is made, you can short your positions.
That said, to stay ahead of the pack, astute traders will use their knowledge of historical trading patterns that follow different fundamental events like earnings announcements, stock splits, takeovers, reorganizations, acquisitions, or even analyst upgrades and downgrades. That way, they can make the most of said events and profit from those decisions.