TradingCenter’s Guide to Investing and Trading Stocks & Indices
Stock investing is a challenging task that involves gathering key information (macro, industry, etc.) and then selecting stocks through careful analysis. Equity traders can access thousands of stocks and indices worldwide through various trading platforms and hundreds of brokers.
This analysis begins with key areas of fundamental analysis, continues with major technical analysis tools for stock traders, and ends with advice from well-known investors.
Discovering the Potential of Stock Market Investments
Technical Analysis is always important, and TradingCenter offers hundreds of technical analysis resources, including its own unique TA tools and indicators. However, fundamentals matter most in equity trading. The main factors that drive the stock market higher are (i) overall liquidity conditions, and (ii) expected earnings reports.
TradingCenter's Outside-In Investing Model
Outside-in investing starts by analyzing the economy and the overall industry, then moves to individual company analysis. Our system can be applied in five steps:
1️⃣ Analyzing the Macroeconomic Landscape: Identifying the Stage of the Macro-Cycle 🔗 Money Supply, Liquidity, and the Course of Global Markets
2️⃣ Selecting Industries: Sector Analysis {technology, future growth rates, threats of substitutes}
3️⃣ Identifying Market Leaders: Strategies and Competitive Advantages
4️⃣ Evaluating Management: Never invest in companies led by poor managers
5️⃣ Analyzing Corporate Reports: Balance Sheets and Earnings Reports
Evaluating True Value is crucial for making profitable stock market investment decisions. Here are the five most important methods for evaluating stocks:
Investment Valuation Methods ■ Revenue Valuation ■ Earnings Valuation ■ Cash-Flow Valuation ■ Equity Valuation ■ Empirical-based Valuation
🔗 Resources: » Fundamental Analysis | » Investment Valuation Methods
Fundamental Analysis and Objectives
The main goal of a fundamentalist is to identify financial securities priced below their fair market value. Fundamental analysis seeks to estimate fair value and also to assess the risk of each investment. Identifying risk is essential for managing your portfolio effectively.
Everything is Risk/Reward. The two main goals of fundamental analysis are:
✅ Determine the fair value of financial securities (profit potential)
✅ Identify and measure risk (loss potential)
Fundamentals are based on internal and external factors that affect an investment. For example, when buying a US stock, you need to consider the company’s balance sheet as well as the current stage of the US macroeconomic cycle.
Building a Fundamental Analysis Framework Internal factors of fundamental analysis include facts and figures such as: (1) Earnings per Share – EPS (2) Projected Earnings Growth – PEG (3) Dividends Paid (4) Sales per Share (5) Shareholders' Equity (6) Debt Exposure Analysis (7) Cash-Flow Analysis (8) Management experience and effectiveness (ROE and ROI ratios) (9) Strategic Analysis concerning new investment projects (10) Estimations about future Demand / Supply of the company's products/services
🔗 More: » The Basics of Fundamental Analysis
Financial Ratios 🔗 Explore Financial Ratios
Financial ratios are commonly used to compare companies and industries across various aspects, including profitability, dividends, book value, and more. For a company, ratio analysis is based on the current share price or overall market value (capitalization).
- The market value of a company is calculated by multiplying the current share price by the total number of shares outstanding (number of shares × share price).
Major Ratio Categories
1️⃣ Balance Sheet Ratios ➡ Measuring Financial Stability
2️⃣ Operating Ratios ➡ Measuring Performance
3️⃣ Efficiency Ratios ➡ Measuring Efficiency
4️⃣ Valuation Ratios ➡ Measuring Effectiveness
After exploring some key areas of fundamental analysis in stock trading, let’s move on to some major areas of technical analysis.
Technical Analysis When Trading Stocks & Indices
Charles Dow (1851–1902) is known as the father of modern equity technical analysis. His ideas, later called Dow Theory, explain how markets move in trends and pass through different phases. Other analysts, such as Ralph Nelson Elliott, later expanded on his work.
Timeframes The chart timeframe you use depends on your trading style: Day traders often look at 1- to 15-minute charts Swing traders use hourly or daily charts Long-term investors rely on daily or weekly charts Key Technical Analysis Tools for Equity Traders Today, equity traders use several technical analysis tools to guide their decisions, including: ☑️ Spotting overall market direction (higher highs/higher lows and lower highs/lower lows) ☑️ Identifying historical support and resistance levels ☑️ Checking for potential MACD/RSI divergences on higher timeframes ☑️ Using chart or candlestick patterns to detect momentum shifts or time trades ☑️ Fibonacci retracements (23.6%, 38.2%, 50%, 61.8%, 76.4%) to find likely support or resistance during pullbacks 🔗 Fibonacci Primes ☑️ Fibonacci extensions (100%, 161.8%) to estimate profit targets
Table: Key Indicators & Signals for Equity Traders
|
|
Primary Function | Chart | Trading Signals |
|---|---|---|---|
|
|
Daily Chart |
|
|
|
Daily/Weekly Chart |
|
|
|
Monthly Chart |
|
|
|
Weekly Chart |
|
🔗 More: » Technical Analysis | » RSI Precision v.3 (Multisignal Indicator)
The Dow Jones Industrial Average
The Dow Jones Industrial Average tracks the price changes of 30 U.S. companies, which is why it’s often called Dow 30. It was introduced in 1896 by Charles Dow. Earlier, in 1884, Dow introduced the Dow Transportation Average, the oldest stock market index in the U.S.
The Dow Jones Industrial Average (DJIA) is the most important and influential stock market index in the world. The S&P 500 ranks second, followed by the Nasdaq 100.
✅ The 30 companies in the Dow are traded on either the New York Stock Exchange (NYSE) or the NASDAQ.
✅ The Dow Jones is so important that if an equity-trading strategy doesn’t work on the Dow, it likely won’t work on any other index.
✅ Dow Jones provides the ultimate framework for historical backtesting when trading equities.
🔗 More: » The Dow Jones Industrial Average
Standard & Poor's 500 Index
The Standard & Poor's 500 Index includes 500 leading American companies listed on the NYSE or NASDAQ, covering about 80% of the available market capitalization. The S&P 500 is based on the market capitalizations of 500 large U.S. companies with common stock. Introduced in 1923 as the ‘Composite Index,’ it expanded to 500 stocks on March 4, 1957. Today, it is one of the most traded equity indices in the world. The S&P 500 stands out from other U.S. stock indices because of its unique weighting methodology.
Applying Peter Lynch's Formula to the S&P 500
In his book One Up on Wall Street (1989), renowned mutual fund manager Peter Lynch presents a simple model for comparing corporate growth to stock-market price.
🔗 More: » The S&P500 and the Stock Market Formula | » Valuing the Stock Market with P/E, PEG, and Shiller P/E
Common Equity Strategies
Here is a table showing key stock investing and trading strategies with their concepts, timeframes, and tools. The first two are common investing strategies with a long-term horizon, while the last three are common trading strategies with a short-term focus.
Table: Key Equity Trading Strategies
|
Equity Strategy |
Objectives | Timeframes | Tools / Indicators |
|---|---|---|---|
|
|
Weekly → Monthly |
|
|
|
Weekly |
|
|
|
Daily → Weekly |
|
|
|
15 minutes → 1 hour |
|
|
|
1 minute → 1 hour |
|
Advice and Insights from Legendary Investors
There is much to learn from guru investors, but knowing whom to trust requires careful judgment. Guru investors often have good reasons to tell the truth on certain matters. Conversely, don’t fully trust CEOs and hedge fund managers, as they are motivated to share only the truths that benefit them and hide others. Here are some important quotes for equity traders (press the slider):
These are some important quotes for equity traders: 1. Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years {Warren Buffett} 2. Never invest emergency savings in the stock market {all professional investors} 3. It's NOT how right or how wrong you are that matters, but how much money you make when right and how much you do not lose when wrong {George Soros} 4. Look at market fluctuations as your friend rather than your enemy and profit from folly rather than participate in it {Warren Buffett} 5. Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria {Sir John Templeton} 6. If investing is entertaining and if you're having fun, you're probably not making any money. Good investing is boring {George Soros} 7. I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful {Warren Buffett} 8. The individual investor should act consistently as an investor and not as a speculator {Ben Graham} 9. The stock market is filled with individuals who know the price of everything, but the value of nothing {Phillip Fisher} 10. The invisible hand of the market always moves faster and better than the heavy hand of government {Mitt Romney}
🔗 More: » Trading Tips for Starters
Review Brokers for Trading Stocks and Indices
By exploring our review section, you can find the brokers that best match your trading profile.
You can trade stocks and equities through a stockbroker or a CFD broker. CFD trading offers higher leverage but comes with significantly greater investment risks. TradingCenter has published numerous reviews of stock and CFD brokers.
🔗 More: » Reviews Section | » CFD Brokers | » Forex Brokers | » Stock Brokers
■ Introduction to Equity Trading
TradingCenter.org (c)
You are not allowed to publish, reproduce, translate, merge, sell, rent, or distribute any content on this website (TradingCenter). You are not also allowed to create a derivative work or utilize framing techniques to enclose any content on this website (TradingCenter).
L MORE TUTORIALS • GENERAL GUIDES » Learning • TUTORIALS • OTHER RESOURCES
» Equity Trading
» Training
» Fundamental Analysis
» Rating Formulas
» RSI Precision
» Trading Books
» Forex Brokers
