The stock market and The Basics of Investment


Stock Analysis
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Stock Analysis

Financial analysis

You should evalute financial statements of firms interested covering a period of many years. At least, five years. Benjamin Graham (the father of value investing) favored a look back of a decade or more for many analyses.
Financial statements contain Balance Sheet, Cash Flow, Income Statement.
Web site Microsoft-Money give financial statements of firms covering a period of five years and their key ratios.

Fair value

Fair value is used as an estimate of the market value of an asset (or liability).The fair value of a stock can be considered as the intrinsic value, or true value of a stock. If you can find stocks that are cheaper than its fair value, it is probably a buy. If your stock holding rises way above your calculated fair value, it is most likely a sell. This fair value is not constant, fluctuating due to several factors from interest rate movement and to commodity prices.
After having your stock's the fair value. You need to calculate its Margin of safety. It means you should pay a price far enough below value to avoid losses.
Margin of safety = (fair value - current price)/current price
Very conservative value investors insist on a thick margin. For example, margin is greater than or equal 25%.

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