The amount of profit a company makes depends a lot on things happening with in the company and things outside that affects the business.
Internal things include The nature of the product The business model The quality of management
Things external to the company include Access to credit Interest rates Competition Commodity prices Exchange rates Consumer spending House prices Inflation Unemployment Taxation Government spending Social change Environmental changes Wars
As well as what is happening in other economies around the world
Of these, external factors probably affect profitability and the share price more than anything else.
The study of these external factors is called economics. The more you know about economics the better you will be able to forecast what might happen next and put an appropriate value on shares.
You can keep track of what is happening in an economy by keeping an eye on the indicators such as the following -
Local and overseas Stock market indices http://au.finance.yahoo.com/investing
production related figures such the Baltic Dry Index http://www.bloomberg.com/apps/cbuilder?ticker1=BDIY%3AIND
Interest rates Australia http://www.abs.gov.au/Ausstats/[email protected]/0/B3F2D558A5ACC9C7CA2575270011CD3F?opendocument US http://www.primerategov.com/prime-rate.html The rate banks lend to each other http://www.primerategov.com/libor-rate.html
You can follow a lot of other indicators by going to a government body charged with tracking such things like interest rates, consumer prices, unemployment and so on. In the case of figures relevant to the Australian economy you would go to the Australian Bureau of Statistics. Here is a least of the key economic indicators http://www.abs.gov.au/AUSSTATS/[email protected]/mf/1345.0?opendocument?utm_id=LN just click on the number to get the information.
You can go directly to certain key figures here.
Consumer price index (CPI) http://www.abs.gov.au/AUSSTATS/[email protected]/mf/6401.0?opendocument?utm_id=LN
The producer price index (PPI) http://www.abs.gov.au/ausstats/[email protected]/mf/6427.0
and http://www.abs.gov.au/ausstats/[email protected]/Latestproducts/6202.0Main%20Features2Jun%202009?opendocument&tabname=Summary&prodno=6202.0&issue=Jun%202009&num=&view=
house prices http://www.abs.gov.au/AUSSTATS/[email protected]/MF/6416.0
You can work out when indicators are due to be released by looking at this calender.
Just go to the website on the date of release to get the figure. http://www.abs.gov.au/websitedbs/D3310114.nsf/home/Home?opendocument
The market will probably be expecting one figure. If the actual survey result is different then investors may start buying or selling and the share prices of stocks in certain sectors may move in one way or another.
Here is a good one for key US figures such as cpi, ppi, and gdp You can also see so good definitions of these key figures here as well.
government spending can be tracked by reading newspapers Here are two of the most important in Australia - the Sydney Morning Herald http://business.smh.com.au/ and the Australian http://www.theaustralian.news.com.au/business/
The business part of an economy is divided into various sectors. Companies on the stock market are divided into industrials and resource companies. Resource companies are basically companies that dig stuff up and are associated with digging stuff up in some way eg mining companies and oil drilling companies are resource companies. Anything that is not an resource company is an industrial company eg retailers, transport companies and so on
Industrials could be divided into Building and construction Developers
Banking engineers Listed investment companies Real Estate Investment Trusts (REITs) Insurance Transport stocks eg airlines, Utilities Gaming companies Beer and Wine Retailers Healthcare Info technology Media Packaging
Resources companies might include Precious metals Gold
Energy companies Oil Uranium Coal Coal seam gas
Bulks Iron ore
Base metals Zinc Copper Nickel Lead Aluminium
Soft commodities
Grain companies Livestock companies Timber Fertiliser and chemicals companies
There are numerous categories. You should categorise businesses according to your needs at a particular time.
Economies are dynamic interdependent systems. A change in one indicator may affect the whole economy or it might affect one sector at the expense of another. For example the Middle East is the major supplier of world oil. Any disruption to supply and force prices up. A rise in the price of oil may force up petrol prices and reduce consumption in all other aspects of the society. You therefore might find oil prices going up but the whole stock market declining. Higher prices however may benefit one industry at the expense of another. A higher price will lead to higher profits for oil producers, but higher prices can lead to higher costs for companies and lower profits for users of oil such as airlines and transport companies. You therefore find that a rise in the oil price will lead to a jump in the share price of oil companies and fall in airline stocks.
Good traders seem to know what is related to what and what might happen if one aspect of the economy should change and what else might happen. They are experts at working out when a butterfly flaps its wings in Brazil and what it might mean for Russian equities or US treasuries.
get a good grasp of competition
also look at the nature of the product the business model the quality of management
after that you might start learning how to read financial statements
there are three the cashflow statement the income statment the balance sheet
next look at the key ratios eg debt to equity interest cover return on equity margins growth in earnings
combine what you know the actual business and the financials to make a forecast
once you have a forecast you can start valuing companies
the best methods of valuing are the Brian McNiven method the two stage model the warren buffet 15% return model price to earnings price to book value
once you know what a company is worth compare it to its price to get the best return buy undervalued companies sell over valued companies
once you have got that far you can start looking at market forces
you can guage them via charts, candle sticks, price and volume, director and institutional buying
use technicals to confirm you what you have found out from fundamentals
