Gathering information to learn stock trading, and better understand the philosophies that create success, is an ever evolving job; and if done correctly, you will earn profits. Having a solid foundation based around these four tips for better understanding a company’s balance sheet is a great start to learning, and succeeding at, stock trading.
What is a Company Balance Sheet?
A company balance sheet is a snapshot of their financial situation at any given point in time. You can locate this information using Yahoo Stock Quotes; click on Key Statistics in the left hand column. Lets look at some key statistics that should be focused on and why.
1. Debt to Equity Ratio
No matter what the large financial picture is at any given time, a company that has more money than they owe in debt is in good shape. A positive debt-to-equity ratio can be understood just like your own personal finances. If you have more money or other assets than you owe, you should be happy.
2. Shares Short
An individual investor must understand that there are people in the investing world that know more than they do. A high percentage number of shares short, tells the individual investor that the smart money is betting the stock will go down. The higher the percentage number of shares short, the higher the likelihood that the stock will not be moving in a positive direction in the near future.
3. Market Capitalization
This is calculated by the number of outstanding shares a company has, multiplied by the stock price. This can be a number in the millions or billions. The smaller the market capitalization, the better chance the company has of growing at a fast rate. The bigger the market capitalization is, the smaller the gains will be; and typically, the losses will be smaller as well.
4. Return on Equity
When Return on Equity (ROE) is in the double digits, this is a good thing. ROE is calculated by the income of a company, divided by the company’s equity. This shows the individual investor how well the company is using its investor’s money. Remember, the higher the number the better.
In order to learn stock trading, you must have a basic foundation in reading a company balance sheet. It may take some work to completely understand these four pieces of a company balance sheet, but it’s a must if one wants to successfully trade stocks.
Start by analyzing some stocks you already own, or have owned, and see if you can gain any insight into the company by reading their balance sheet.
Read Learn Stock Trading Part 2 >>
