Fundamental Business Analysis and the Stock Market – What you Need to Know to Thrive

Making money on the stock market depends on what strategy you intend to follow. Failing to have a strategy for the stock market turns what is a sensible, reasonable investment into an unreasonable gamble. While there are lots of permutations to stock market strategies, they fundamentally boil down to two: Buy to hold and buy to sell at a higher price. Both of these strategies are enhanced by a sound set of analytical principles applied to them.

Buy to hold (aka the Warren Buffett strategy) means that you're taking a long term position on the stock and expecting its dividends to provide you with income and value, and is the least risky of the two strategies. Buy to re-sell means picking a stock that's undervalued and selling it when the price increases, turning a nice tidy profit on the difference (or delta) between the two. It's considerably riskier, but the odds of making a lot of money quickly are there.

Analyzing stocks can be a never ending trek of trying to get perfect information to make the perfect buy or sell. There is no such thing as perfect information in a chaotic system like a stock market; there is some information you should know about every stock.

What are the company's earnings per share, after expenses? This is, in essence, profits after expenses, divided by the number of shares circulating, and gives you a rough idea about what sort of financial disbursement you'll get from owning a share of that company. If you divide the sale price of the company by the earnings per share, you get a price/earnings ratio. This will tell you how many years of earnings at the current rate would be required to buy one share of the company, and is a good measure of how highly regarded the company is – high, but not stratospheric, P/E ratios on stable stocks mean you've got a sound investment. Low P/E ratios mean you've got a company that may have stability issues. Elevated P/E ratios (like Google) mean that a lot of investors are speculating that the price is going to continue to rise, or that the company is going to create a new niche and revenue growth will follow.

The next piece of fundamental analysis you should do on a stock is to find out what products the company makes, and go to the super market and watch what people buy – companies that make things tend to be good long term investments, but horrible for rapid share price gains. Tech stocks, where the products made tend to have a short shelf life, are more volatile.

Other trends to look at are national weather patterns. If a hurricane is due to hit, the time to buy shares of Home Depot is just before it hits, and sell it shortly afterwards. (After hurricanes, the demand for plywood and building supplies goes up rapidly on a regional basis, and the share price of Home Depot rises a bit.)