Stock Analysis

There are two basic methods investors use to predict price changes in the stock market: Technical and Fundamental Analysis. Technical analysts use price history while fundamental analysts use financial data and news. Every investor uses their own combination of technical and fundamental analysis. There are even those who rely solely on one or the other. It's up to you to decide which information is the most valuable.

Technical Analysis
If you've done any research at all for your investments, then you've seen at least a basic price graph of a stock. Most sites will let you view the price graph over a different time periods to give you a better idea where the stock is headed. When in this basic view, it is important to look at the price history from each of these perspectives. A stock may be increasing in value for the day or week, but is suffering from a price decline that has been consistent over the past month and year. It will be up to you to decide if the short-term increase is the start of a long-term boom or just a fleeting spike. Other mathematical graphing tools such as bollinger bands, linear regressions lines, and moving averages can be used to give you a long term-perspective on short-term events. These methods can also sometime be refereed to as quantitative analysis.

Fundamental Analysis
If whatever animal hotdogs are made from suffer from a disease that wipes half of them out, what do you think might happen to the stock price of company that makes hotdog buns? If the government plans to introduce a new tariff that will tax imports on cars, what will happen to the stock price of a chinese car manufacturer that relies on exports to the U.S. for 75% of its revenue? If the CEO of a major corporation gest caught in some rediculous scandal, what might happen to the price of their stock, or the prices of the stocks of companies which relied on their success? Fundamental analysis takes into consideration changes in economies, markets, industries and individual companies.

Short Selling

So far I have only told you ways to profit from the value of a stock increasing, buying low and selling high. Now I am going to introduce a way of making money when the value of a stock is falling, called short selling.

If you execute a short sale of 100 shares of Google (Nasdaq: GOOG), you effectively borrow 100 shares from your broker with the promise to return the shares at a later date with interest on the current value of the stock. You then immediately sell those 100 shares. Then once the stock has dropped in value you can repurchase the 100 shares from the market and return them to your broker with the interest you owe. It is important to note here that when repurchasing the shares from the market, you have to specify "Buy to Cover" in the order type.

You make profit according the original price of the stock(P1) minus the current price of the stock(P2) minus the interest rate(i) times the length of time you borrowed the shares(t) times the original price of the shares all times the number of shares you borrowed(S#).

S#(P1 - P2 - itP1)

So if you short sold 100 shares of Google at $600/share at an interest rate of 4%/year and repurchased the shares 6 months later at $500 you would profit:

100($600 - $500 - .04 x .5 x $600) = $8,800

Considering this required an investment of only $1,200 in interest, you would have made 633% on your money, because if you will remember, you only borrowed the initial shares.

Be careful though because if you predict the market wrong you can lose a lot of money. If we describe that situation again but swap the initial and ending price, we can see how potentially devastating a short sale can be.

100($500 - $600 - .04 x .5 x $500) = -$11,000

Ouch.

Good luck profiting from failing businesses.