Analysis and Trading of Stocks and ETFs 101


Analysis and trading of stocks and ETFs

Analyzing and trading stocks and ETFs can be very rewarding. However, it takes a lot of time to identify potential opportunities, entrances and exits, not to mention good risk management. Successful trading begins long before a position is opened.

We will break the analysis down into two areas – basic and technical (using charts). Here you will find dealers who prefer religiously to others. Some traders believe that you cannot mix these two types of analysis together. However, there is no rule or reason why the two cannot complement each other.

In this article, we will focus on explaining how to perform fundamental analysis when analyzing and trading stocks and ETFs. Below are four key steps to help you make more informed trading decisions.

Analysis and Trading of Stocks and ETFs 101

4 key steps to analyzing and trading stocks and ETFs

The analysis of financial data, the place within the industry, management and competitive advantage of a company falls under the fundamental analysis. Fundamental analysis plays an important role in both value investing and growth investing strategies.

It includes both quantitative and qualitative analyzes. Just like technical analysis, it’s a very large area. You can spend days analyzing just one company.

So where do you start It really depends on what you want to achieve. Are you looking for a stock that will rise very quickly? Are you interested in startups or biotech? Or do you just want a stable stock with good dividends?

Let’s look at the latter – a stable stock that pays a dividend and has some upside potential.

1. Screen securities that do not meet your criteria

Above we said we wanted to find a «stable» stock or an ETF. To meet this criterion, you need a security with a good track record. Otherwise, how do you know if it’s stable? That excludes startups. Stable also means non-volatile. That excludes biotech, pharmaceuticals and certain technology stocks.

We’re probably looking for a bigger company with a pretty big market cap. Market capitalization is the number of shares issued multiplied by the share price. A market capitalization of over $ 50 billion and a stock price of at least $ 100 are good minimums.

You can find these companies using the screener tool at Yahoo Finance. Click the Create New Screener button. Then click on «Large Cap» and a share price of at least 100 USD.

Currently, some of the stocks that appear after applying these filters are Lockheed Martin Corporation, Target, and FedEx. These are companies that have been around for a long time and that are well managed.

connected: Key Value Stock Fundamentals for screening stocks

2. Examine the volatility of an asset based on its beta

Clicking on Target (TGT) takes you to the stock’s page. You can see that the stock is paying a dividend. It has a beta (5Y Monthly) of 0.99.

Analysis and trading of stocks and ETFs

Beta is a measure of the price movement of a stock compared to the S&P 500. Less than 1.0 means the stock is moving less than the S&P 500. Greater than 1.0 means the stock is more volatile than the S&P 500.

We are looking for stability. A beta of 1.0 is roughly the maximum we would like. Although less than 1.0 is more desirable.

3. Use the P / E ratio to find the value

At the time of writing, TGT has a PER of 20.72. This translates into a trailing 12 month price of 20.72. A high PE Ratio can mean the stock is overvalued or expensive. A low PE means the stock could be good business. Is 20.72 a Good PE for TGT?

To find the answer, we need to know the historical PE of TGT and compare it to the PE of retail. To see the historical P / E of TGT we can use macro trends.

You will notice in the table above on this page that TGT is part of the Consumer Defensive Sector. You can see the average PE of this sector here on Finviz on line 3 which is 26.45.

Average PE ratio by sector

This means that TGT is undervalued compared to its industry. In the graph below, TGT is just below its all-time high in 2014 of 21.34. Shortly after that high, TGT’s P / E dropped into the low teens and slowly began to rise.

The share price remained relatively stable over this period. Both the PE and the share price have risen since the end of 2019. Should we worry that TGT is overrated?

Target P / E ratio

Well, we know that both the stock price and P / E ratio are at or near all-time highs. All-time highs are not a good value. By definition, you’re paying the highest price the company has ever had. It may not be the best time to invest in TGT. And when we have a lot of stocks in TGT, it could be a good time to sell some and make a profit.

connected: Two metrics for top-down market valuation

4. Review the company’s financial information

This is an area we could spend days in. However, as an individual investor, being able to quickly view a company’s financials and assess its financial health is a valuable skill.

We provide you with some tools for a quick analysis. The following are some important values ​​(from Finviz) that must be taken into account for TGT:

  • Profit margin: 4.00%
  • Income: 3.82B
  • Fast relationship: 0.40
  • Cash per share: 12.17
  • Dividend yield: 1.54%

For each of the above factors, it’s important to compare Target with its industry peers. For example, a quick ratio of 0.40 (meaning that Target’s cash equals only 0.40 of its liabilities) might seem worrying on the surface. But it might help you calm down when you find that Walmart has an even lower Quick Ratio of 0.20.

Final thoughts

A fundamental analysis is important to determine a company’s financial and competitiveness. It can be used in the same way for ETFs. When you’re ready to analyze and trade ETFs, check out our favorite stock brokers here.

We have only scratched the surface of fundamental analysis in this article. Even after completing the above steps, you still need to analyze the company’s management, industry trends, financial trends for the company, and key competitors.

That seems like a lot of work, and it is. But the more you do fundamental analysis, the more proficient you will become. However, if you prefer to go more hand-in-hand with your investment, consider an index-fund or robo-advisor approach. Compare robo-advisors here >>>

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