In the first part of this sequence of articles on learning stock trading, I covered an introduction to reading a company balance sheet. Adding more tools of analysis in increments will help you learn the art and science of stock trading; as reading and understanding a company’s balance sheet is a must for the individual investor. Let's continue.
1. Quarterly Revenue Growth
When a company has revenue growth, it means the amount of money they are taking in is growing compared to the last quarter. Positive revenue growth doesn’t always mean the company is showing a profit, but typically means they will be. When a company holds more money for itself, as a result of positive revenue growth, this can lead to higher profits or more investments to grow the company’s business in the future.
2. Liquidity
If you own a stock you want to be able to buy or sell the stock when you need to. Companies that have a liquid stock allow you to do this. To discover how liquid a company’s stock is, monitor how many shares trade on an average day. Without numerous shares of a company trading on any given day, if you are forced to sell, you may get a much lower price.
3. Being listed on a major exchange
The major exchanges that your stock should be listed on are the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX). This tells you is that the company has high degrees of financial reporting, and meets the requirements of the major exchanges. While money can be made on smaller exchanges, more money can be lost. When your stock is on one of these major exchanges, you know that you are getting a proven stock that meets regulatory guidelines.
4. A rising tide lifts all ships
When the major markets are all going up, typically companies with strong business models and balance sheets go up with the market as well; and many times stocks that have bad balance sheets go up too. When the tide starts to go down, this is when a company’s true colors show. A marginal company can go down substantially more than a solid, all around company.
A company’s balance sheet is a snapshot in time. In order to learn and succeed at stock trading, the individual investor must read and analyze company balance sheets. Add these pieces to the previous lesson in stock trading, and review again some balance sheets of companies you either already invest in, or plan to invest in.
