Expert stock picks
On the Stock Picks page of the Million Dollar Wiki, you can find the daily stock recommendations of Jim Cramer, host of the CNBC show Mad Money. He is a market mover and you can track his top stock picks here. However, you should always do your due diligence by following proven methods of stock analysis such as fundamental analysis or technical analysis. Whichever method you choose, or maybe a combination of both, the secret to picking great stocks is to formulate a disciplined plan when screening stocks. With a well developed investing strategy, and information at your disposal, you will no longer be picking stocks blindly.
At the most basic level, fundamental analysis is the study of income statements, balance sheets and cash flows.
Income statement: discloses a company's revenue and expenses. This statement provides the company's earnings.
Balance sheet: discloses a company's assets, liabilities, shareholders equity and retained earnings.
Cash flow statement: discloses the direction of cash entering the company through sales and investments and its exit through operational costs.
With the three financial reports as named above, an investor can calculate a multitude of ratios including these broad categories:
- liquidity ratios (how well can a company meet its short term debts?)
- leverage ratios (how much of a company growth is financed by debt?)
- profitability ratios (how capable is the company at generting a profit?)
- valuation ratios (how fairly priced is a company's stock with respect to its profit?)
Since the goal of investing is to buy low and sell high, many financial gurus have formulated different calculations to find out the true value of a company. Examples include:
- Benjamin Graham's intrinsic value formula 
- John Burr Williams' discount cash flow and dividend formula 
- Warren Buffett's value investing formula with a margin of safety 
Using target values for financial ratios as stock screening criteria as well as the intrinsic value, the informed investor chooses to make an investment because the stock is:
- priced at or above intrinsic value but has potential for growth,
- a combination of growth and value,
- properly discounted at today's value for future dividend income.
People who use this type of stock analysis tend to be buy and hold investors with a long term time horizon.
A second approach to picking stocks is to use technical analysis. Technical analysis is the study of supply and demand to predict the future market price of a security. Most view this type of activity as day trading but the holding time can be within a day or even long term.
Types of charts
Technial analysts chart historical prices in a variety of ways including these popular methods:
Using graphs for a specific time scale, a technical analyst identifies uptrends and downtrends. He/she looks for patterns that would indicate buying and selling opportunities. Some classic patterns include:
- head and shoulders - could be a downtrend
- inverted head and shoulders - could be an uptrend
- double/triple top - tests resistence level, might be time for profit taking
- double/triple bottom - tests support level, might be a buying opportunity
- and many, many more
When analysing chart patterns, the volume of trades should always be kept in consideration to validate the trend.
Moving Day Averages
To reinforce chart pattern signals, a technical analyst smooths out graph fluctuations using moving day averages to make trends and their reversals more obvious. The technical analyst can graph the moving average by using these popular methods:
- Simple Moving Average (SMA) - the sum of the closing prices of a stock for X amount of days divided by X
- Exponential Moving Average (EMA) - gives more weight to the most recent dates used in the calculation
Generally, if the stock price is above the 200 day moving average, it signals that it is in an uptrend. Conversely, it is in a downtrend if it is trading below the 200 day moving average.
Moving Average Pairs
A pair of moving day averages (e.g. 10 and 20 day) is often used to confirm buy and sell signals for the short term trader. Look for crossover points especially at rounding tops and bottoms. A rounded bottom with the shorter moving day average crossing over on top of the longer is considered a signal to buy. A rounded top with the shorter moving day average crossing underneath the longer is considered a signal to sell.
Moving average convergence divergence (MACD)
The MACD is a very well known tool used by technical analysts to measure momentum. It uses two EMA moving averages and subtracts the longer moving average from the shorter moving average (e.g. 12 day EMA - 26 day EMA). The difference is plotted against a center line along with a 9 day EMA to act as the trigger line. When the MACD crosses above the trigger line, this is a bullish signal; a bearish signal when it crosses below the trigger line. Also note the difference from the center line. When the difference gets smaller, this might lead to a signal change.
Despite the two camps of thought, decisions can be made based on both stock investing methods. Think of an investor who believes that the fundamentals of a company are sound but because of a market downturn, the share price is low. He/she sees that a support level in the charts has been established and is ready for an uptrend.
Peter Lynch, the famous mutual fund manager claimed that an observant investor can outperform a stock analyst because he/she is more in tune with local companies. Therefore, you might be giving yourself the best stock tip available. The key to good stock picks is to gather all the information available to you and doing the investment research.
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