Trading for Dummies® 2nd Edition

Chapter 6. Digging Into the Critical Parts of Fundamental Analysis

In This Chapter

• Adding up the income

• Following the cash

• Checking on the balances

• Running the ratios

Most traders don't worry about the fundamentals. These numbers include the general economic and market conditions that impact a stock, as well as the financial information known about a company's activities and its financial successes and failures. Instead, traders tend to focus entirely on technical analysis and trends that can be seen using that type of analysis.

Taking the time to analyze the fundamentals of a stock puts you one step ahead of the trading crowd. Using fundamental analysis, you can determine how a stock's price compares with those of similar companies based on earnings growth and other key factors, including business conditions. This chapter helps you understand critical parts of fundamental analysis and how you can use the information gathered from it to make better trading decisions.

When starting a fundamental analysis, select an industry or business sector that interests you for possible stock purchases. Sometimes, a particular company piques your fancy, and you start your research by looking at the major players in that company's sector or by turning to the sector's fundamentals. Regardless of how you start, you need to narrow down your list of the companies you want to compare to the ones that are in similar businesses within the sector, so you can find the best opportunity. You also want to be sure ...