How to Evaluate A Stock | Finding Stocks That Are Worth Buying

Stock Evaluation Intro Image Stock Chart and Businessman with Shopping Cart

Stock evaluation doesn’t have to be overwhelming. Many people shovel money into a brokerage firm and let them figure it out. But what if you want to get a bit more involved?

With a bit of research, you can take control of your money and choose some companies to invest in on your own. All it takes is a few basic factors, and you will be on your way to being a sharper investor.

So, let’s delve into the basics of stock evaluation so you can see what it’s all about.

The Two Types of Stock Analysis

We’ll start by looking at the two primary analysis types before investing in individual stocks.

Fundamental Analysis

This method of analysis assumes that a stock’s price doesn’t necessarily reflect the company’s actual value. You use other valuation metrics and information to determine if the current price is a bargain.

This strategy is excellent for long-term investors who want to hold a stock for ten years or more.

Technical Analysis

Technical analysis assumes that a stock’s price represents all available information and that it will move with trends. Reading charts and their patterns is essential in technical analysis.

Many investors use this analysis to predict which direction a company might go in short term.


How to Research Stocks

So, how do you get started? Here are the first things to consider as you dive into stock research. 

Find Your Focus

There are thousands of stocks out there and almost a dozen sectors. You can dive into finance, healthcare, consumer goods, energy, big tech, industrial products, etc.

You want to whittle things down to one or two sectors, which keeps you from being overwhelmed and helps you assess a company’s competition more quickly.

Use Qualitative Research Factors

Know the company. This mindset borrows from an old Warren Buffett adage, and it rings true if you want to become a shareholder in a business.

You should know what they do or produce and how they make money. It is also good to know who runs the company, their directors, leadership track record, and how they invest in the operation.

Use comparison charts to compare the company’s short- and long-term performance against the competition and the overall market. What causes dips and drives rallies?

Gather Data from Tools and Reports

There are quarterly reports, earnings figures, sector and market trends, and news from everywhere. You could spend your entire day trying to digest it all.

Luckily, this is the tech age, and all sorts of tools and apps can help you collect information on a company. A quick Google search for financials and news, paired with the dynamic stock charts in StockMarketEye, will get you started on the right foot.

How to Evaluate Stocks to Buy

There are a few critical indicators in picking a good stock. The following are some fundamental ratios to assess the value of a company and if it may be a good time to buy.

Price-To-Book (P/B) Ratio

The P/B ratio is essentially the assets of the company minus its liabilities. This one is the bare-bones indicator of a company’s worth and effectively represents its value if it gets sold today.

Anything of value goes into the price-to-book ratio, such as physical equipment, buildings, land, and other assets like stock holdings and bonds.

It is a helpful factor because companies in major industries may decrease in growth but are still valuable in terms of assets. A low price-to-book may mean the stock is undervalued and worth a second look.

Price-To-Earnings (P/E) Ratio

Investors and analysts give the P/E ratio a lot of attention as a good indicator of company value. The formula is simple; if a stock trades at $20 a share and has earnings of $2 a share, the P/E ratio is 10. That’s the share price divided by earnings per share.

There are trailing P/Es that experts use to compare past performance and forward P/Es to help project the future. Value investors like a low P/E ratio.

Price-to-Earnings Growth (PEG) Ratio

The PEG ratio considers the past growth rate of a company’s earnings. It is the P/E ratio from above divided by the year-over-year growth rate of earnings.

The PEG is an excellent way to compare competitors and a great way to assess low-priced or penny stocks. Analysts like a stock with a PEG ratio below 1.00 because of its growth potential. But it is very speculative since there are no guarantees.

Dividend Yield

Everyone likes a little money back on investments from time to time. Dividends are periodic payments companies make to stockholders to share their profits.

Some investors look for high dividends as a sign of a healthy company, but inconsistency could be a red flag. When looking at a prospective stock, check if the dividend payments have increased or decreased year over year.

Assigning Value to Stocks Helps You Choose What to Buy

If you take all of these factors into account, you’ll have a good idea of the value of a stock. This research aims to help you feel confident about your next investment decision. You may even get a picture of a stock’s future, but nothing is certain.

Can You Find A Sure-Fire Winner?

While this is stock research 101, we hope the above factors will give you a jumping-off point and help you build your portfolio.

Of course, you can still pay that broker to manage some of your investments. Still, maybe you’ll feel more confident buying an individual company with a bit of your budget.

With StockMarketEye, you can import the portfolio from your broker and track all your individually researched stock picks against it. Can you beat their average return?

What is Volume in Stocks? How This Crucial Number Affects Your Trading

Stock Volume Bars With Blue Price Line

Volume is an essential part of stock trading analysis. It shows current trends, buyer and seller sentiment, and which company shares are more liquid than others. This number changes wildly as crucial information comes in and savvy traders analyze.

If you’ve been investing or have ever looked for a new company to get into, you’ve probably seen volume before. But what is “volume” in stocks, and how should it affect your decisions?

The Meaning of Stock Volume

In essence, stock volume is the total number of times a security has changed hands over a set amount of time. This number gets estimated throughout the day, sometimes hourly, and at the close of the market. The precise final number only gets reported the following day.

Since prices often change in correlation with higher volumes, many traders also keep track of the tick volume or how often the contract’s price changes. Ultimately, the volume gives investors a good look at a market’s overall activity and liquidity.

Higher trade volumes are attractive for investors. They indicate many people are buying and selling a specific company, so connecting a sale should be quick and easy. On the other hand, low volumes could be a sign of little interest, making buying or offloading a specific security somewhat cumbersome.

How Does Stock Volume Work?

The stock volume is quantified by how many shares are bought and sold between market open and market close. Many of the same shares may be traded back and forth on the same day at different prices, and each transaction gets counted towards the total volume.

Stock trading volume should not be confused with dollar volume, which represents the aggregate value of the traded shares. For example, if a particular stock has a stock volume of 100,000 shares at $5 per share, the dollar volume would be $500,000.

Volume Defines a Stock’s Liquidity

When researching a stock, you can use the volume to determine how difficult it may be to get rid of your shares should you decide to sell them.

Stocks with lower volumes tend to be harder to get rid of in large numbers. Sometimes transactions take longer to connect, or sellers end up letting shares go below market value at a discount. That can lead to a gap between the ask price (the price set by sellers) and the bid price (the amount buyers are willing to pay), which can increase volatility.

On the contrary, stocks with a higher volume tend to be easier and faster to sell at market value. Think of it like desired toys around the holidays flying off the shelves.

Using Stock Volume When Trading

Volume can be an excellent way to identify the strength of a market. Here are a few ways to utilize this number to your benefit:

Finding and Confirming Trends

Simply put, a rising market usually experiences rising volumes. In order to maintain the enthusiasm of prices moving upward, investors will be buying and selling shares in larger quantities.

Essentially, a drop or rise in price on little volume is not considered a strong indicator. If prices increase while volume decreases, this may indicate a reversal soon. However, this same price rise or drop in a large volume is a much stronger indicator that something noteworthy has changed.

Look at Volume History

The volume history of a stock is a key technical indicator in the overall analysis of a stock. Analyzing the patterns of stock volumes over time can help to get a good feel for rises and drops in particular stocks and markets.

That may be especially true for options traders since volume is a strong indicator of current interest in a particular option contract.

Exhaustion Moves Show People’s Limits 

In a declining market, you can see exhaustion moves. These are typically sharp moves in price correlated with sharp volume increases, indicating the probable end of a trend.

If you get FOMO (fear of missing out) for action at the top, you may end up in a pool of exhausted buyers. Alternately, at the market bottom, the declining prices eventually force a fair amount of traders to sell, resulting in increased volatility and volume. There will usually be a decrease in volume after the initial spike in these scenarios.

Identifying Bullish or Bearish Signals Through Volume

It gets a bit tricky, but you can use stock trading volume to identify bullish and bearish signs.

For example, say volume increases on a price decline. Afterward, the price moves higher but is followed by another dip. If the volume falls off and the price on that second dip doesn’t fall below the first dip, it is typically regarded as a bullish sign.

Early Indication of Reversals

After a longer price move in one direction, you might see the volume buildup, and the price change starts to slow down. This pattern may indicate that a reversal is on the horizon, and prices could change their direction.

Tracking Stock Volumes With Stock Market Eye

StockMarketEye allows you to track your investments and watch lists in one place. You can save time navigating the day’s trades and finding important metrics at the click of a button.

Our software allows you to track unlimited portfolios and stress test different scenarios. Stock volume and even historical changes are shown clearly. The red and green bars on our charts are easy to understand at a glance and help you make valuable decisions.

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What Is Average Volume in Stocks?

The average volume of stocks is the sum of all daily volumes over a period of time divided by the number of days. Typically, this number gets calculated over six months to come up with a much more stable average, but let’s look at a simple example for a single week using the table below:

Day of the WeekXYZ Stock Volume
Monday2,500
Tuesday13,600
Wednesday3,000
Thursday8,750
Friday9,800

To find the average daily volume for this week, we would add the volumes for all five days together and divide the total by five days. That gives us an average daily volume of 7,530.

Mon 2,500 + Tue 13,600 + Wed 3,000 + Thu 8,750 + Fri 9,800 = 37,650 total volume for the week
37,650 total volume / 5 days = 7,530 average daily volume

This number is an important metric used by traders because both high and low volumes attract various types of prospective investors. Most traders look for higher daily averages during their analysis since that makes getting in and out of positions easier down the road.

So, What’s a Good Average Daily Stock Volume?

A good average daily trading volume (ADTV) varies from person to person and company to company. The specific indicators you analyze will also determine what a good ADTV is and if the asset will be a good addition to your portfolio.

Higher sustained trading volume tends to be over 500,000 shares a day and equals more liquidity, which, as we’ve mentioned, most investors prefer. But perhaps the best ADTV is a stable one because when the number rises or falls sharply, it may indicate a noteworthy change in how investors value an asset.

If a breakout begins, an increase in volume can confirm that breakout. In contrast, a sudden lack of volume may indicate that the breakout will fail.

Most Popular Stock Volume Indicators

Have you ever heard of The Chaiken Money FlowKlinger Oscillator, and Money Flow Index? These volume indicators use various mathematical formulas to show something a little different about a stock volume.

These and other popular stock volume indicators can help clarify your final decision. Let’s take a look at the top three most common ones:

On Balance Indicator

On-balance volume (OBV) is an effective indicator where volume gets added when the market is higher or subtracted when the market finishes lower. The result is a running total that shows what stocks are being accumulated.

Often times this metric gets used for finding contrast. For example, the price may increase, but the volume increases slower than expected.

Accumulation and Distribution Indicator

The accumulation and distribution indicator uses volume and price to give insight into how weak or strong a trend is.

Suppose a stock price is rising, but the indicator is dropping. In that case, the buying volume (accumulation) might not be enough to support the inflated price, and a drop may be on the horizon.

Relative Strength Index (RSI)

The RSI is an indicator that measures momentum via the speed and magnitude of price changes.

It looks at overvalued and undervalued conditions and helps identify securities that can potentially be primed for reversals. Many investors look to this metric as a signal of when to buy or sell.

Start Monitoring The Volume of Companies on Your Watch List

Volume can be a fantastic way to study trends and find new liquid companies to buy. Depending on the depth of analysis you’re doing, indicators based on volume are significant to help you make your final decisions.

Though volume analysis is not an exact science, it can be a handy tool for savvy investors to analyze for more costly trades.

StockMarketEye software makes tracking volume straightforward with easy-to-read charts and graphs. There is no learning curve to overcome, allowing you to immediately begin analyzing stocks more accurately. Sign up for a trial today to get started!

Bull vs. Bear Market | Defining Both With Everything You Need to Know

In finance, you will often hear the names “bull” and “bear” describe certain market conditions. For example, you may have heard that the U.S. has been in the bear market territory for most of 2022. But what do these large animals have to do with investing, and how often do they rear their heads?

Let’s look at bull markets vs. bear markets and see what kind of impact they can have on your investment portfolio.

What is a Bull Market?

When a market is “bullish,” it is typically either rising or expected to shortly. Generally speaking, market observers will call it a bull market when markets rise and continue to without falling more than 20% from a previous 52-week high.

What is a Bear Market?

A “bearish” market is one that is in the process of consistently falling for an extended period. A market is officially a bear when conditions are falling or expected to fall by 20% or more from its previous 12-month peak.

Factors That Define Bear and Bull Markets

The first part of 2022 has been a US market bear, and it doesn’t seem like there will be much reprieve in the near future. Some experts are even predicting that there will officially be a recession within the first two quarters of 2023.

Several things determine whether or not a market is heading into bullish or bearish territory. Everything from supply and demand, sharp changes in economic activities, and investors’ psychology and emotions will directly affect the market’s direction. Take a closer look at some common factors that affect the market below.

Market Bubbles

A bubble is the rapid increase of market value immediately followed by a sharp drop in value, often referred to as a “crash” or “the bubble popping.” Bubbles are often surges in asset prices, typically driven by erratic market behavior.

Assets are typically traded at far higher price ranges than usual during a bubble, far exceeding their actual inherent value. Bubbles are usually only identified after they burst and a massive price drop occurs.

Tulip mania in Holland from 1634-1637 is one notable example of a bubble bursting. A more recent example is the 2008 housing crisis.

Inflation

Production costs, supply and demand, and monetary policies all affect the price of goods. Inflation is when prices rise. There is some expected and average inflation over time, but sharp increases can be problematic.

Price inflation influences both bull and bear markets and vice versa. During a bull market, when the economy thrives, production might increase, and people could buy more or have extra money to spend, slowly driving prices to creep upward.

Consumers tend to dial back spending in a bear market and get a bit more conservative. Shrinking demand can cause rapid deflation in extreme cases.

War

According to a 2015 Swiss Finance Institute study, in cases with a well-known “prewar phase,” any increase in the likelihood of war tends to decrease stock prices. However, if a war breaks out, their price will increase. On the contrary, when war erupts as a surprise, the initial outbreak decreases stock prices.

This phenomenon is “the war puzzle,” and there is no apparent reason for the behavior. Overall, U.S. markets tend to stay steady during wars. From 1939 to 1945, during World War II, the Dow was up more than 7% per year and 50% in total.

World Events

World events such as natural disasters, terrorism, and civil unrest can affect markets. 9/11 had a direct effect, as many investors chose to trade less and choose more conservative investments.

Indirect influence also regularly happens in markets in response to world events. For example, in response to military actions abroad or civil unrest, the stock prices of military equipment and weapons manufacturers will likely rise due to defense contracts.

Current Interest Rates

Lower interest rates are typically associated with bull markets, while the opposite is true about bear markets. Higher interest rates slow companies’ expansion and growth, putting less money in investors’ pockets. On the other hand, lower interest rates make it more affordable for businesses to borrow money and increase their production and growth strategies.

Overall Sentiment or Emotion

Human psychology plays a significant role in the price of stocks, with investor sentiment and emotion being a sizable factor in the market’s overall direction.

In bull markets, investors are much more eager to participate in trading and take more risks to earn a profit. People will buy new technology, make stock gamble plays, and hold positions longer during upward trends.

In a bear market, when the sentiment is less optimistic, investors tend to transfer their money from equities to fixed-income securities as they wait out the downturn. These downturns in stock prices cause hesitation and doubt, leading investors to pull their money from the market, which causes a general price decline.

A History of Bull vs. Bear Markets in The USA

Both bull and bear markets are cyclical economic events that have happened many times throughout U.S. history. Analyzing their history can help to make better investment decisions, regardless of the current market trends.

US Bull Market History

Bull markets take up much more time than their bear counterparts and are much more robust. The average bear market decline has been 27%, while the average bull market gain has been 167%. Since World War II, there have been 13 bull-bear cycles in the U.S., with the average bull market lasting 1,630 days and the average bear market lasting only 419.

It has taken the economy an average of 26 months to recover from a bear market. However, it has historically recuperated just fine and has rebounded even stronger each time.

US Bear Market History

Bear markets are diverse, if anything, varying in severity, length, and impact. Between the end of World War II and April of 2022, there have officially been 14 bear markets. Based on historical Bloomberg data, their severity fluctuated from a 51.9% drop in the S&P 500 to a 20.6% decline.

Bear markets can occur broadly over entire markets or just in particular sectors. Economic activity is a cyclical series of bull and bear markets. Over the long term, bull markets have gone higher and lasted exponentially longer than bear markets.

How Frequent Are Bear Markets?

Famous examples of bear markets include the dotcom crash (2000-2002), the stock market crash of 1929, and the bear market following the housing market crash (2007-2009). A recession often accompanies these bear markets, although this is not always the case. Of the 25 bear markets in the U.S. since 1928, only 14 have seen recessions, while the other 11 did not.

S&P Bull and Bear Market Length in Days Since 1927

What Do Investors Do in Bull Markets vs. Bear Markets?

Savvy investors should seek to take advantage of the rising prices in a bull market by regularly purchasing stocks and selling them off to actualize their profits. Losses in a bull market should be less severe and fleeting, as investing in equities when the market is bullish should equate with a higher probability of profit.

It’s difficult to escape drops in your portfolio during a bear market. Losses will be more common, and timing the end of the bear market will likely be tricky. Because of this, short selling becomes a more attractive option. Although many investors simply elect to put their money in safer investments, such as bonds and other fixed-income securities.

Dividend Stocks Can Hedge Your Losses

Many investors also turn to dividend stocks, whose performance in the market is typically affected less by changing trends. These industries, often things like utilities, are designed to be excellent hedges against inflation and are stable in both bull and bear markets.

The Long Game Investors Don’t Deviate From the Plan

The market is ever-changing. It can be volatile or steady, and everything can change overnight. Because the market changes so much, plenty of stimuli may sway an investor’s choices, making them deviate from their plan.

Buy-and-hold investors have a set amount they invest on a schedule. They do not deviate from that plan, regardless of world events and how they affect the markets. These types of investors are playing the long game. They are looking at their investments for years and decades rather than the volatile daily or monthly life occurrences.

Don’t Navigate Bull or Bear Markets in the Dark

Investing takes time, knowledge, and experience. All of that can be costly, even for investors that have been following the markets for years.

StockMarketEye is a stellar way to follow your investments, regardless of the type of market. You can also stress-test your portfolio against potential market conditions and compare your standings against historic market numbers of the past. This design allows the software to tell you if you beat the average, fell short, or are about par for the course.

The longest bull market was from 2009 (after the housing collapse) until 2020 when the COVID-19 pandemic hit and tossed everything out of whack. Over those 11 years, a 30-year-old investor might have only experienced growth and profits since before they could order a drink in the bar.

Were you ready for the current bear? Do you have a plan in place for a possible upcoming recession?

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