Professor Elam

Monday April 7, 2014

We are studying the equity section of the balance sheet in a couple of the intermediate classes. We received an excellent question from an alert accouting student today. Here is the quesion.

Is there a common process to evluate a stock's potential as to possible upside or downside in price, at least that is the gist of the question a I understood it.

An overview of security analysis is here.

Indeed there is. The two camps of analysis break down into

Fundamental Analysis this has to do with the financial performance of the company. A macro analysis would start with the overall economy and then drill down to the industry, and the specific competitors in the industry and then to the one company. What is the business strategy, how experienced is management, how leveraged is the company, as Buffet might ask, is there a moat around the company insulating it from competition, and dozens of other similar questions. 

Technical Analysis is explored in this article.  The idea is that all the information about a stock is contained in the price and volume action of the stock.  Investors apply that information to make decisions every day as ot wehtherto buy or sell. 

Intermarket analysis looks at stocks, bonds, the Dollar and commodities. Additionally closely related markets like lumber and stock prices of home builders might be examined. 

And of course there is social mood.That can drive stocks with no earnings like Tesla or a limited history like Facebook to very high prices. 

A complete discussion is clearly beyond a blog post but there is plenty of information at the links I posted.