Charts and Stock Research Tips

Analyst recommendations are supposedly trust-worthy but investors have grown weary and leery of putting their cold hard cash down on a stock only to encounter revisions, downgrades and outright madness just weeks later.

Analyst recommendations tend to differ slightly depending upon the brokerage firm but most tend to center around the following ranges:

• Buy: Anticipated total return in excess of historic annual rate of 10%
• Hold: Neutrality anticipated.
• Sell: Negative return anticipated.

In the wake of overly-optimistic analyst recommendations, a more realistic interpretation might be something closer to:

• Strong Buy: We think it will keep pace with federal savings bonds and at least you shouldn't loose money.
• Buy: Comparable to savings bonds but a lot more fun plus we get to keep the fees.
• Hold: Don't sell until we have cashed out.
• Sell: Get what you can because the market has already tanked and this baby is next in line to be delisted.

	Book: The Pied Pipers of Wall Street: How Analysts Sell You Down the River
	Book: Confessions Of A Wall Street Analyst: A True Story Of Inside Information And Corruption In The Stock Market

Investors that would never think of taking a gamble on a "hot stock tip" overheard on a discussion forum or elevator routinely fall victim to another common fallacy: Believing everything they read as long as it is cloaked in the shroud of an "analyst report".

Analyst report stock recommendations based upon "Buy", "Sell" or "Hold" ratings after reviewing the current market conditions, company issued statements and a host of other criteria. Sounds easy enough - let the experts do the research and allow informed investors to act on the information; after all, analyst reports can cost hundreds or even thousands of dollars depending upon the provider.

Indeed, analyst reports are useful tools particularly if issued by well known brokerage firms or other institutions however, even those have limits. By the time the average small investor has an opportunity to obtain a copy the information has been widely dispersed and acted upon. Furthermore, analyst reports are only one small segment of the investment picture and should not be used in isolation. Finally, analyst reports are only as good as the original research. This final point is where most novice investors go wrong.

Don't believe everything you read. Research has repeatedly found a disproportionate level of "buy" recommendations compared to "sell". In fact, the ratio is nearly 50 to 1 in favor of "buy" recommendations. By definition, since only half of all stock can perform better than average, the number of "buy" versus "sell" recommendations should be close to equal. Researchers decided to find out what fuels this overtly optimistic trend among investment analyst and found the increase in "buy" recommendations closely correlate with the stocks underwritten by their employer or firm.

Use caution when reviewing analyst reports by following these simple tips:

1. Read reports by authoritative analysts with proven track records.
2. Use analyst reports as one segment of your own personal research. They can provide valuable insight into the current climate of the corporation.
3. Have your own strategy and understand the fundamentals before investing.
4. Tame the claims. Take anything less than a "strong buy" with a grain of salt.
5. Don't make decisions in isolation; read reports in conjunction with your own research.

Create Your own Stock Watch list now

Book: Fire Your Stock Analyst: Analyzing Stocks on Your Own

No, the title isn't suggesting the optimistic type of investing; but bull as in baloney. Beta has its uses and limitations. First, let's be clear about what beta is - and isn't. Beta is a measure of volatility of a stock as compared to the market. Sometimes the entire market is teetering on the edge so it is only natural that most stocks will follow suit. On the other hand, if the market is purring right along like a well oiled machine and a given stock is sending off volatility signals that look like an 8.0 on the Richter scale then an investor has the right to expect dramatic reward for that risk.

Now for what beta isn't. Beta isn't a predictor of future risk. By its very nature, beta uses historical measures and then describes the current situation. Beta also isn't good at tracking upward or downward volatility.

Once you understand beta then it is a useful tool.

• Stocks with beta greater than 1 indicate greater risk and price volatility than the overall market.
• Stocks with beta less than 1 indicate less risk and price volatility than the overall market.
• Stocks with a beta of 1 approximate the risk and price volatility of the overall market.

A stock watch list is a lot like window shopping - you see something you like but you aren't quite ready to make it your own. Maybe the timing is wrong or maybe you want to comparison shop. Maybe you just like a bit of a tease to whet your appetite. Whatever the reason, creating a stock watch list is easy and a great way to stay on top of your favorite stock.

Most online trading venues - and even fantasy trading games - allow you to create a stock watch list simply by typing in the ticker symbol. For example, Wall Street Survivor offers a stock watch list free for all Survivors. It's easy to track gain and loss, price over a period of time and even engage in a little self-defeating torment by calculating what could have been if you had purchased at a given time in the past. Some will even email an alert if a price hits your target range.

Quick, convenient and motivating. Don't believe me? Create your own stock watch list and let it ride for a couple of years then check in to see what you have been missing. Ouch.

Past performance is not an indication of future performance. How many times have you heard that? Of course, earnings estimates provide one strong measure of potential future performance and are a mainstay of stock investing research.

Earnings estimates are exactly what they sound like: an estimate of forecasted earnings. Notice the built in ambiguity? It's there for a good reason. Revised estimates are a given contingent upon market conditions, the overall economy and other unforeseen forces impacting the profitability of the company. You might wonder how analysts get away with forecasting earning estimates only to revise them - repeatedly - at the first sign of trouble. All too often, the average investor has already acted on the first estimate and is left holding a rapidly declining security - sans fees.

Is there a solution? Yes, search for companies with upwardly revised earnings estimates and steadily rising analyst ratings.

P/E Ratio. It sounds good and makes novice investors feel like they have a grasp of the situation but how valuable is the Earnings Price Ratio?

Surprisingly, the price to earnings ratio is a useful tool but certainly not the holy grail of investing as it is sometimes made out to be.

For those novice investors, the P/E Ratio provides a numeric representation of the value between the stock price and earnings. To derive the P/E Ratio you divide the share price by the company's EPS or Earnings Per Share. The formula looks like this:

P/E = Stock Price/ EPS

Simple really. So, what does the P/E Ratio actually tell you about the desirability of a stock? Potentially several things but each much be taken in tandem with other known metrics:

1. Market sentiment. An overly optimistic P/E Ratio can indicate the market expects big things from this company. Temper optimism with reality.
2. cOver priced or over-bought. A high P/E Ratio can indicate a given stock is priced to high and ready for a correction. Be sure to compare against industry norms.
3. Lack of confidence. A low P/E Ratio may indicate a lack of confidence in the future of the company.
4. Sleeper. A low P/E Ratio might be a sleeper just waited to be discovered.

Discover P/E ratios for any company for any company on our Stock Summary page

Learning how to read a stock trading chart takes time. It's not something you can sit down and master in one afternoon but with a bit of practice and persistence it is possible.

It's also a great skill as well as a pre-requisite for technical trading. Use this plan of action to get started:

1. Inform and educate yourself. Plan on spending some time reading, doing a bit of research and collaborating with others who use various methods. Compare your findings against theirs. Participate in a fantasy stock market game like Wall Street Survivor. Join a stock forum.
2. Set a schedule. Make research and trading a regular part of your routine. There is a lot to learn and the market fluctuates throughout the year. Holidays, seasonal changes, quarterly reports and more will gradually make more sense as you see the results reflected on the stock trading charts.
3. Use a checklist for each chart. Learn how to obtain specific information from each chart. For example:
• Is the stock trending up or down?
• What patterns do you see?
• Where are the support and Resistance levels?
• What does volume indicate?
• How strong is the trend?

Start reading Stock charts

	Book: How Charts Can Help You in the Stock Market
	Book: Stikky Stock Charts: Learn the 8 Major Chart Patterns Used by Professionals and How to Interpret Them to Trade Smart--in One Hour, Guaranteed

Earnings report stock trends, profit and more but making sense of an earnings report can seem daunting especially in light of Enron and Worldcom. What is the best method of making sense from earnings reports? First and foremost, read between the lines and don't be afraid of playing the role of cynic.

1. Don't rely on corporate sponsored press release statements. They tend to play up the positive and down play the negatives. A press release isn't required to comply with SEC (Securities and Exchange Commission) regulations so don't put much weight on it. Instead, take time to actually read the earnings report. It will include cash flow, income statement and balance sheet. That's a lot of good information for those who take the time to read it.
2. Dare to compare. Don't just look at quarterly growth but compare to year-over-year growth and even five year growth. Look for increased growth and be sure to take inflation into account before getting overly excited.
3. Track sales-to-receivable ratios. Abnormal ratios in this area are a common red-flag that could signify trouble ahead.

Profit. It could be one of the most misunderstood aspects of investing. If there is any greater indication of the average citizen's financial ignorance it would be hard to find but then again, this is a society that actually fall for .99 cent pricing schemes over and over.

There are actually two types of profit: economic profit and accounting profit. It's a good idea for investors and traders to understand both types.

Economic profit is when you increase wealth after excluding the cost of making the investment including the "opportunity costs" of investing in the selected instrument. This is an important consideration. For example, if you had $1,000 to invest and decided to put it in a savings bond that earned 05% then you would have earned $50 before taking out taxes or other fees. Let's assume for the sake of the example you invested it into a stock that earned 15%...now you would have earned $150 or $100 more than the first example. By deciding to invest in the savings bond you missed the opportunity to invest in the stock. That missed opportunity is your "opportunity cost" and it comprises a real factor when determining economic profit.

Accounting profit on the other hand is simply the money brought in from sales minus the cost of doing business including depreciation, wages, interest, loan repayment, cost of goods sold etc...

Take both forms of profit into account when evaluating your personal investment strategy, prospective investment targets and performance.

What are they doing with your money? Have you ever wondered how well your money is really being managed by the corporations you hand it over to? After all, the media is full of stories about CEO compensation reaching new heights, buy-outs of non-profitable holdings, million dollar birthday parties and other horror stories.

Return on Equity (ROE) is used to measure how much profit a company is able to generate from the money invested by shareholders. Think of this way; if your teenager asked to borrow $1,000 to start-up a small side business then chances are you would comply. When they came back to ask for $10,000 you would examine how well they performed with the initial $1,000 before making the next loan. It makes such good sense that you might wonder why more people don't use this handy little measure before pouring massive sums into a money pit masking as a company.

Join the ranks of those in the know. ROE is easy to compute and provides valuable insight into the workings of the company. Think twice before investing in a company with a negative ROE. Instead, search out self-sustaining companies with a healthy ROE that indicates the willingness and ability to use invested dollars for future growth rather than operating expenses. A good ROE is 15% or better so keep your eyes - and ears - open for opportunity.

Research Return on Equity for any company on our Stock Summary page

Contrary to popular opinion, stock investing research doesn't consist of buying the stock of whatever company made it to the nightly news. It also doesn't require you to spend the next 20 years eating dinner while watching the Nightly Business Report. There is a happy medium. Use this handy stock investing research checklist to get started on painlessly taking control of your own financial future.

1. Find a low cost broker.
2. Pay attention to fees...especially maintenance fees. Inactivity charges are a favorite. Don't pay for nothing - literally!
3. Keep leverage to a minimum. You are paying your bank or broker for the benefit and eating away your own profits.
4. Make sure your account is insured. Recently the media was filled with headlines of a popular investment site going down the tubes. Don't put yourself at risk. Only deal with reputable brokers who are fully insured.
5. Try before you buy. Not all investment advice is what it is cracked up to be. Request a free trial account or newsletter before spending the big bucks.
6. Understand taxes. Taxes can take a major bite out of profits so understand what you are able to deduct, what records are required and the tax consequences of each decision.
7. Track Inflation. All of your investment decisions should take inflation into account. A good rule of thumb is to search for stocks that will provide a return equal to the rate of inflation plus current interest rates.
8. Diversify but know the industry. Invest in what you know.
9. Risk-free Returns. There are no truly risk free investments but federal savings bonds come close. Always compare your rate of return versus the rate available through federal savings bonds or other low risk investments. The risk should be proportionate to the reward.
10. Practice makes perfect. Use a virtual or fantasy stock trading game to try out your strategy.

Everyone has their favorite stock market research myths but here are a few you might like to add to the collection:

Fallen Angels Rise. The devil is in the details. The rationale behind this myth is that buying at a 52 week low leaves nowhere to go but up. Buying on price alone is a recipe for disaster. Companies can - and will again - be delisted. It is possible for a stock to decline even further. Buy value not vapor.

What Goes Up Must Come Down. Really? Was Berkshire Hathaway expensive at $6,000 per share? What about at $10,000 per share? Who could have imagined $70,000 per share? That is just the point; the force of gravity doesn't apply to finance. Inflationary pressures alone dictate a continued upward momentum for the entire market so it is at least theoretically possible for any given stock to continuously increase. Notice - we didn't say "probable" just "possible".

Stock Market Investing is the Same as Gambling. This really depends on how you go about it. If you follow the masses then chances are you will obtain the same returns...dismal. On the other hand, vast fortunes have been made by more than chance alone.