5 Things You Need to Do Before Every. Single. Trade.
Dear Penny Stock Millionaire,
Stock research is one of the fundamentals of good trading. If you aren’t researching stocks, or aren’t researching them the right way, you are putting your money at unnecessary risk.
Yesterday, I shared what good stock research is, and 2 tips to get your started. Today, I’ll give you 5 more tips so that you can be confident in your research and take your trading to the next level.
#1 Look for Great Stock Market Indicators
What you want in a stock you’re thinking about trading is movement. You can potentially profit from buying a stock that goes higher. And you can potentially profit from selling short a stock that goes lower.
But you can’t profit from a stock that stays in the same range. So look for indicators that bring you good or bad news.
Positive signs for stocks include getting new contracts, closing new rounds of financing, and entering into new partnerships, stuff like that.
Bad news can be almost anything. Let your imagination run wild. There’s some crazy shit going on with businesses out there — always remain vigilant in your research!
Get to Know Stock Chart Patterns
Anybody can look at a stock chart and see whether the current price is high or low compared to the past. It’s also not normally hard to see whether the price is in an up or down trend, or whether it’s range-bound.
That’s why it takes more than that to make money from your trading.
You must know and recognize the important stock patterns. I can’t emphasize this enough.
Stock prices move in a variety of ways, and those movements are often predictable, according to the pattern they form.
They move in predictable ways because they reflect the hopes and fears of the people in the market.
People react in typical ways to certain events. When you recognize those events, based on the chart patterns you see, you can sometimes predict whether other traders are going to buy or sell.
#2 Importance of Stock Valuation
I love bargains. You love bargains. When you go to your favorite restaurant and see they’re running a sale, you love getting $5 off your favorite meal, right?
But what would you do if they raised the price to $500? No matter how delicious the food is, you’d go to another restaurant.
We love bargains, and we don’t want to pay too much for things we buy.
Except in the stock market, where people pay too much all the time.
That’s why stock valuation is so important!
Apple, Amazon, and Google may be three of the best companies in the world, but if you pay too much money for them, you’re going to lose money.
By the same token, if you find a stock that’s just half-decent, but it’s “on sale” for a very low price, you can potentially get more value for the same money.
#3 Company Balance Sheet
A company’s balance sheet is one of the most important basic financial statements.
On the left side of the balance sheet is all its assets. Assets include cash in the bank, shares of stocks and bonds, accounts receivable (bills owed to the company), factories, land, manufacturing equipment, computers, patents, and everything else that enables that company to sell its products and services or which can be converted into cash.
At the top of the right side of the balance sheet is the company’s debts. This includes accounts payable (bills the company owes), pension liabilities, and bonds.
In general, the less debt a company owes, the better. Just like people, a company that owes nothing but its current electric bill is in far better financial shape than a company in way over its head struggling to pay for the raw materials it needs to manufacture its products.
The bottom of the right side of the balance sheet is the company’s equity. That is the difference between the total assets and total debts. It’s how much the company owns free and clear of any debt.
The two sides of the balance sheet must be the same. That is, they must balance.
Total Assets = Total Debts + Total Equity
Got it? Good. Let’s move on to another super-important financial statement: the almighty earnings report.
#4 Earnings Report
The balance sheet is an important snapshot of the company’s overall financial condition. However, remember that the purpose of a company is to make money.
Therefore, the earnings report (or income statement) is the most important financial report.
It can also be boiled down into a simple equation:
Gross Earnings – Total Expenses = Net Earnings
Gross earnings are all the money the company has made from selling products and services. Some companies also make money from investments and the interest on cash they have in the bank.
Total expenses include everything the company must pay, except for buying assets.
An example of some expenses includes electric bills, salaries, rent, interest, taxes, advertising, sheets of iron required to manufacture the product, and much more.
However, it does not include a new forklift. That’s considered buying an asset. Who knew?! You should. I should. If we want to get ahead as traders, this is shit we need to know!
Expenses also include depreciation, which doesn’t require cash. It’s a bookkeeping way of accounting for how forklifts and other machinery go down in value over time. Therefore, some companies manipulate depreciation.
What’s left over is net earnings.
The higher the company’s net earnings, the better.
Look at the most recent earnings report you can. Company earnings do go up and down, so you want to see what’s happening now, not last year. Check out the net income for the most recent quarter.
#5 Keep Improving Your Knowledge
OK, so you’ve learned about stock market research. Learn more. Learn as much as you can. But don’t beat yourself up if a trade goes south, because it WILL happen.
Even armed with a shitload of stock market research, you’re going to make mistakes. That’s normal. If making money from trading was easy, everybody would do it, and it wouldn’t even pay the minimum wage!
Research takes time and consistent effort, but it can potentially pay off.
If you need help with your stock market research, consider getting a trading education. A lot of people don’t want to spend money to become day traders. They want to earn money, right? So it may seem backward to invest in day trading classes. However, it’s important to look at the big picture here, as the cost of a lack of education is often infinitely greater than that of a proper education.
Consider this: Many of my students started out believing they didn’t need day trading classes, either. But then they got into the market and started losing money. For many, this was the realization that made them see the value in getting a trading education.
What about you? Are you willing to invest in your knowledge now, and prevent potential losses in the future?
The Bottom Line
You should never, EVER, treat stocks as an impulse buy.
Too many people lose money because they invest in a company they heard about on social media or because it came recommended by a guru. There is nothing wrong with getting a hot tip, or someone giving you advice, don’t get me wrong. But that doesn’t mean you blindly follow what they say. Don’t become one of those people!
It’s your money at risk. Perform your due diligence. Yes, it takes time, but you can get the job done quicker with knowledge and a good stock screener, so you’re in better shape starting out than I was.
Editor, Penny Stock Millionaires