Introduction to the Stock Market_1. Introduction to the stock market

Lesson 1: Introduction to the stock market

The first way is called fundamental analysis.

The biggest part of fundamental analysis involves delving into the financial
statements. Also known as quantitative analysis, this involves looking at revenue,
expenses, assets, liabilities and all the other financial aspects of a company.
Fundamental analysts look at this information to gain insight on a company's future
performance.

But there is more than just number crunching when it comes to analyzing a
company. This is where qualitative analysis comes in - the breakdown of all the
intangible, difficult-to-measure aspects of a company.

There are two basic ways you can invest or trade in the stock market.
Fundamental analysis serves to answer questions, such as:

- Is the company's revenue growing?
- Is it actually making a profit?
- Is it in a strong-enough position to beat out its competitors in the future?
- Is it able to repay its debts?
- Is management trying to "cook the books"?

The various fundamental factors can be grouped into two categories: quantitative
and qualitative. The financial meaning of these terms isn't all that different from their
regular definitions. Here is how the MSN Encarta dictionary defines the terms:

● Quantitative – capable of being measured or expressed in numerical terms.
● Qualitative – related to or based on the quality or character of something,

often as opposed to its size or quantity.

In our context, quantitative fundamentals are numeric, measurable characteristics
about a business. It's easy to see how the biggest source of quantitative data is the
financial statements. You can measure revenue, profit, assets and more with great
precision.

Turning to qualitative fundamentals, these are the less tangible factors surrounding a
business - things such as the quality of a company's board members and key
executives, its brand-name recognition, patents or proprietary technology.

Neither qualitative nor quantitative analysis is inherently better than the other.
Instead, many analysts consider qualitative factors in conjunction with the hard,
quantitative factors. Take the Coca-Cola Company, for example. When examining its
stock, an analyst might look at the stock's annual dividend payout, earnings per
share, P/E ratio and many other quantitative factors. However, no analysis of
Coca-Cola would be complete without taking into account its brand recognition.
Anybody can start a company that sells sugar and water, but few companies on
earth are recognized by billions of people. It's tough to put your finger on exactly

what the Coke brand is worth, but you can be sure that it's an essential ingredient
contributing to the company's ongoing success.

The second technique, which is also popular, is technical analysis.
This uses price charts as data to reveal more about the company, and profit from the
patterns that emerge from this data science.

Financial securities are traded all over the world in places called exchanges, and the
denominations by far cross hundreds of billions of dollars every single day.

These trades take place on stock exchanges.
When a trade happens on a stock exchange, it leaves a price data footprint, at what
time the price was traded on, what was the transaction value, how many shares, and
so on.

What technical analysts do is gather all this information with other information like
volume and derivatives of price, which we call indicators, and put it in a visual format
called charts.

This is an example of a candlestick chart, and this is what a bar chart looks like.

Sometimes people just want an average idea of where the stock is going, so we look
at line charts. This doesn’t have a lot of data in it, because it only plots the close for a
day, but it still serves the purpose for the people looking for the general direction of a
stock market.

So technical analysts are basically data scientists.
Larry Page, the owner of Google, who’s also the richest data scientist, once said that
curation and analyzing data and interrelationships is very important.

Technical analysts believe past trading activity and price changes of a security are
better indicators of the security's likely future price movements than the intrinsic
value of the security. Technical analysis was formed out of basic concepts gleaned
from Dow Theory, a theory about trading market movements that came from the
early writings of Charles Dow. Two basic assumptions of Dow Theory that underlie
all of technical analysis are 1) market price discounts every factor that may influence
a security's price and 2) market price movements are not purely random but move in
identifiable patterns and trends that repeat over time.

Technical analysis is used to attempt to forecast the price movement of virtually any
tradable instrument that is generally subject to forces of supply and demand,
including stocks, bonds, futures and currency pairs. In fact, technical analysis can be
viewed as simply the study of supply and demand forces as reflected in the market
price movements of a security. It is most commonly applied to price changes, but
some analysts may additionally track numbers other than just price, such as trading
volume or open interest figures.

Over the years, numerous technical indicators have been developed by analysts in
attempts to accurately forecast future price movements. Some indicators are focused
primarily on identifying the current market trend, including support and resistance
areas, while others are focused on determining the strength of a trend and the

likelihood of its continuation. Commonly used technical indicators include trendlines,
moving averages and momentum indicators such as the moving average
convergence divergence (MACD) indicator.

Whether you’re an investor or a trader, use charts or financial ratios to make your
decision, 3 things are vital to be profitable:

1. The risk-reward ratio
2. A consistent risk management per trade
3. High probability trades

All in all, buying and selling lukewarm setups will do you no good. They will increase
your financial costs, without delivering satisfactory returns.