If you want to make money in the stock market, there are two ways to do it. You can use fundamental analysis or technical analysis. If you’re not familiar with the markets, then you should know that very few traders use both. That’s because fundamental analysis is best suited for long-term investing, and technical analysis is best suited for short-term trading. We’ll focus on fundamental analysis in this article, as this form of investing can be based on the general economy, industry conditions, upper management, and/or the company’s financial situation. Let’s break that down a little bit more.
The Economy
In regards to the economy and how it impacts the stock market, the biggest factor is always going to be interest rates. When interest rates are low the stock market moves higher. When interest rates are high the stock market tends to struggle more. Some people might ask why the Federal Reserve wouldn’t always keep rates low. That would lead to an enormous amount of debt and an unsustainable situation. Some financial experts might say that’s what we have created, but human beings tend to figure out solutions to problems once their backs are against the wall. Therefore, as long as interest rates are low and there are no unforeseen geopolitical events, the stock market should be able to hold its own.
Industry Conditions
When it comes to industry conditions, all you have to do is see if the industry is in a favorable situation at the current time. For example, if a U.S. President is pro-coal, invest in coal companies. If a U.S. President is pro-environment, invest in solar companies. Investing isn’t as complicated as it seems. Logical usually wins in the end.
Upper Management
Upper management should also play a key role in your decision making. If Uber hires a new CEO and that CEO helped another company move its stock price higher over the past five years, that’s likely to be a good investment. However, if Uber hires a new CEO for reasons that seem to be related to personal connections and there is no history of success–or if there is a history of failure–this is likely to be a poor investment.
Earnings
Earnings are one of the most anticipated events for investors, but they shouldn’t be. If you’re an investor, then one quarter shouldn’t play a role whatsoever. Additionally, it’s rarely about earnings; it’s almost always about guidance. Investors want to know where the company is going, not where it has been.
Financial Situation
Then you have the company’s financial situation. You have to look at revenue growth, assets vs. liabilities, and cash flow. Revenue is the key driver of growth, which investors love. Also, if the company is in debt, that’s not necessarily bad. Amateurs might think so, but pros know that if a company can turn around their debt situation and become debt-free while driving their revenue higher, their stock price is going to soar. On the other hand, if you see ballooning debt and revenue decreases, sell your position as fast as possible. If you’re really bold, you can short the stock.
