by Lawrence Sanchez

Created on: February 06, 2010

How to evaluate a stock before you buy you ask, well there are two ways to do this and they are fundamentals and technicals.

Fundamentals tell us if the company is fundamentally sound meaning it is performing the way it should by meeting its obligations such as its quarterly estimates that the street sets for them.  Fundamentals include looking at its balance sheet and breaking it down to determine if the company has legs underneath it or if its a bubble waiting to pop. I like to look at a companies six month, one year, three year and five year. I do this to see how a company has performed against its peers and if its ROI (return on investment) is good I also want to see its PE or price to earnings ratio and compare this to its sector and industry. Another thing I want to see is its EPS(earnings per share) has been rising the way it should. The cash flow statement is also part of this type of evaluation. The cash flow statement tells you if a company is paying its bills and if it still has money left on its books as profit. In other word a good company always looks good on its fundamental analysis. 

Technical analysis on the other hand is the use of graphs and charts to see how a stock is performing now and in its recent past. This type of analysis looks for patterns that can signal a upward or downward movement. Important bench marks for this type of analysis are the five day, seven day, and thirty day performance charts. Technicals use charts and graphs such as the bolinger bands, MACD,Williams percentile, and the Ultimate ocillator. All of these try to look for strong movement that can signal trends that can cause sharp upward momentum or reversals.

Technicals in my opinion are great but in my eyes nothing is better then knowing a companies fundamentals. But the true master of the market uses both of these methods to get a fuller more complete picture of the company he or she is about to invest their hard earned money in. In the world of stock market investing every bit of information you can gather about a potential company that you are planning to take a chance on will help you to make the best possible choice for your money.

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