Choosing a stock to buy or a currency that will rise against another is the most exciting part of investing.
Behind you is a careful look at how good of an investor you are. You have set your objectives. You've gotten in touch with the person who will be your agent and go in on deals with you. You know the market you and he will be working in, and you know the basics of the different kinds of securities you can buy.
So, what do you want to buy?
Whether you want income, growth, or safety, you now have to look at the options and pick the one that seems to meet your needs the best. This means to look into it.
At first, you'll feel like the novice you are.
There are experts in every field who are much smarter and more skilled than you. There are smart people who have spent their whole lives studying rails, oil, utilities, or steel.
There are tipsters with bushy tails who offer tasty morsels that, in reality, turn out to be true often enough to be very unsettling. And there are millions of words of information and advice coming from hundreds of sources, from half-sheet flimsies to Graham and Dodd's "Security Analysis," which is one of the most important books ever written.
It is perfectly fine to use these sources (except the tipster) to help you decide what to choose. If you don't think that the first time you open the box, you'll find a treasure that the pros have missed, you'll probably end up buying a pretty well-known and predictable issue anyway.
Still, it's a good idea to gather as many facts as you can and come up with your own conclusions. To be safe, you might want to talk to your broker about the results of your research. But if you do your own selection process, you will learn a lot about security analysis as a technique and a field.
Discipline doesn't have to get in the way of having fun, and it can be a good way to balance out a too-romantic view of stocks. Even if you like planes, movies, and bourbon, that doesn't mean that stocks of aeroplane companies, entertainment companies, and distilleries are good buys right now.
Let's start by saying that a full-fledged security analysis is a tedious, highly specialised job. Basically, it is an attempt to guess how much money a company might be able to make in the future and, by extension, how much its stock is worth as an investment right now.
Statistics are what the analyst works with. He looks at earnings reports, balance sheets, stock market data, and the different ratios that can be calculated from these things. He looks at the company's long-term debt schedule, any plans for growth that are in the works or being thought about, and its tax situation.
He looks at how the company is doing compared to its competitors. He also looks at how its industry group is doing compared to other groups or the economy as a whole. All of this information is, of course, old. But if the analyst works hard, he will find statistical patterns and trends that tell him a lot about how consistent, stable, and strong the company is, as well as quite a bit about its basic quality.
To this, he adds what he can find out about things like the skill and initiative of the company's management, the potential sales appeal of a new product coming out soon, and the growth factors that are clear in the industry.
In time, he comes to a number of different conclusions, each of which affects the others. The first is a statement about what the facts and assumptions say about the company as a whole. The second predicts how much money each share might bring in over the next year.
The third part, which is the hardest part of security analysis, compares the stock's quality and potential to its current price and tries to say if it is a good investment at this price.
With just a little thought, you can see how delicate the balance between these three things is. On the basis of quality, for example, a bright, young electronics company would almost certainly be seen as worse than, say, Westinghouse.
But if its initial plant-expansion plan had been mostly written off and depreciated, and if the products it specialised in were in high demand, the earnings outlook could be very good and, in the short term, pretty safe. But big profits might have to be taken into account if speculators had already driven up the price of the stock.
On the other hand, if the company had been mostly ignored and was trading at a low price, even a small increase in earnings could make the stock a good investment.
Most analyses only look at the next few months or years. There may be things that let the analyst see the bigger picture. Since 1945, for example, it has been clear that the focus of industry on electronics and automation almost guarantees a bright future for these fields, while the full development of peaceful uses for atomic energy may still be a decade away.
Such broad statements, on the other hand, don't say much about the future of each company, and any analyst will tell you that the further ahead he looks, the more likely he is to be wrong.
To be honest, there are many things that can't be figured out in any analysis. Even a seasoned analyst has to use educated guesses, inspired hunches, and the "feel" of a situation to come to a conclusion.
Except for the hard numbers in a company's financial statements, there are no numbers to be found in things like the efficiency of management or the sales potential of a business. All the analyst can do is set up comparisons. For example, if the performance of Company X's management is 90, then the performance of Company Y's officials can't be higher than 80. And if this relationship is true, then the importance of management in the overall performance of the company must be given a weight.
The effects, of course, will soon be impossible to predict. For example, Company Y may be a long-standing business whose stability and ability to make money are unquestionable.
This should help you figure out how to value shares and choose the best ones. You can help yourself by using modern software.
Using good Forex software can really help you choose good currencies to trade.
