Australian Stock Report is proud to launch the Learn to Trade @ Home education multimedia program.

The Education Multimedia program has been designed with both the beginner and experienced trader and investor in mind.

Learn to Trade @ Home allows you to access education material, review workshop notes and watch live video examples. When the time is right we’ll even help you open your trading account and help you place your first trade, just to make sure that you are comfortable with what you have learnt.

View the content as many times as you like in your home, office or on the road. Interact with all the online education support tools and access our support forum and “Ask the Presenters” to ensure that any of your questions are answered.

View the video below and register your interest.

Learn to Trade @ Home covers 8 Modules, incorporating the following topics:

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A new and exciting concept for traders and investors.  This VIP Traders Conference will be the third of its kind run by Australian Stock Report.  An even better line up of trading eduction, strategies, activities and personal sessions to advance a traders knowledge and skill will be on show.

Held at the prestigious Hyatt Regency Coolum Resort between October 4th and October 8th, the conference will be conducted over 5 days. All of Australian Stock Report’s senior education team will be involved in presenting at the conference, covering advanced trading concepts with a special focus on building and developing a robust trading plan, trading psychology, and also a number of advanced trading strategies.

For more information click here.

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The stock market can be a confusing place, and part of the reason why so many people are confused when they first begin investing is because there are so many different opinions. One stockbroker might say Telstra is worth buying, but another might tell you to steer clear. How can this be?

One reason for this disparity of views is that different people will use different types of analysis to come to conclusions about stocks. There are two major types of analysis: fundamental and technical.

Number crunching

Fundamental analysis is frequently used by traditional stockbrokers and fund managers, and involves an assessment about a company’s operations. A number of factors will be considered in a fundamental assessment of a company.

These factors include profits, the outlook for the industry the company operates in, forecast profit, key personnel in senior appointments, and who is on the board of directors.

In fundamental analysis, cash flows are particularly important, so the analyst pays close attention to sources of revenue and whether they can be consistently relied upon in the future, plans for business growth to name a few.

The assumptions of the technical analyst

Technical analysis is widely used by private traders, although many stockbrokers and an increasing number of investment funds also utilise this form of analysis. Basically, technical analysis is only about the price, and understanding how is moves today should give us an understanding about how it might move tomorrow.

The use of technical analysis and its effectiveness is based on a number of assumptions about the way the market operates. They are:

- The market price calculates the impact of all the news that drives buyers and sellers

- Human nature is constant, so investors generally react in similar ways to similar situations, which in turn creates repetition in certain price patterns

- Prices are not random and will generally move in trends for significant periods of time.

It’s all in the price…

Technical analysis assumes that all the factors that influence the price of a security have already been factored into place.

This is why technical analysts never concern themselves with why prices go up or down. More interestingly, this is also one of the reasons why often the price will be a leading indicator of published information.

The question is, of course, which form of analysis should you use? Unfortunately, there’s no clear cut answer.

At the Australian Stock Report, we use both forms of analysis, but with an understanding that you need to make sure the analysis you are using suits both the company and the timeframe in which you want to hold the stock.

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Fundamental stock analysis can seem scary to most newcomers to the market – and with some reason. Looking at some of the 30-page reports from broking houses, about just one company, can seem stupefying to the best of us.

However, one of the reasons it appears terrifying is that analysts can make it as complex as they like: there’s virtually no end to the level of calculations you can perform.

Importantly, when it comes to numbers, there’s a simple four-step process to fundamental stock analysis of companies. First, is the company likely to still be around in a year? Second, is there cash coming in? Third, is the company making money from this cash? And, last, are you likely to get any of that cash?

1. Balance Sheet

A balance sheet is a snapshot of a business’ financial condition at a specific moment in time. From this, analysts try to identify whether the company is financially healthy, especially in relation to debt.

A balance sheet comprises assets, liabilities, and owners’ or stockholders’ equity. Assets and liabilities are divided into short and long-term obligations including cash accounts such as checking, money market, or government securities.

At any given time, assets must equal liabilities plus owners’ equity. An asset is anything the business owns that has monetary value. Liabilities are the claims of creditors against the assets of the business.

2. Cash Flow Statement:

This is a financial document detailing the exchange of cash between a business and the outside world. The flow is categorised as:

-       flow “in” from Operations (cash the company made by selling goods and services)

-       flow “in” from Financing (cash the company raised by selling stocks and bonds)

-       flow “out” to Investing (cash the company spent investing in its future growth)

Each of these flows can actually flow both ways. It is a measure of a company’s financial activity. Investors like to see that the company can cover its spending with cash from operations, without having to turn to financing.

The cash flow statement also has to reconcile the net effect of these flows with the difference in its cash holdings at the beginning and end dates of the reporting period.

3. Earnings per Share (EPS)

Total earnings divided by the number of outstanding common shares. Great companies have earnings that are growing quarter by quarter, year on year.

However if the number of shares have increased markedly or there has been a merger, the earnings per share can be diluted. Therefore, earnings per share are more important to the investor than total earnings.

4. Dividends

Dividends are distributions of money, stock, or other property a corporation pays you because you own stock in that corporation. Most are paid in cash, but you can also be paid in shares.

Basically dividends constitute the element of profit the company does not reinvest back into itself.  Shareholders will pay income tax with respect to their dividend income.

These four measures aren’t the full story, however. A company might look great, but it might be very expensive. The next step in stock analysis is to understand how much you are paying for the company.

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Stock analysis can be formed in a number of ways, but the end goal is determining a stock’s value.

As a brief summary, these are the stock value techniques most often used in the Australian stock market:

Discounted cash flow - is the most complex of valuation techniques but also among the most commonly used in stock analysis.

Under this technique, an investor or analyst will use a range of variables to try to accurately predict profit results for future years. These future earnings are then discounted back to their present value (value in today’s dollars) to give an estimate of what the company is currently worth (as a whole, or per share).

This technique is best used for companies in which earnings are expected to fluctuate or grow, start-ups, and companies with limited life spans.

Earnings before interest, tax, depreciation and amortisation (EBITDA) – should be used when most comparable companies are based overseas. For example, analysts rating telecommunications companies will often use this technique.

This technique strips out much of the financing and taxation effects from a company’s performance and leaves you with an indication of a company’s core earnings power. This method is also handy for valuing infrastructure companies.

Price-to-earnings ratio – one of the most commonly used valuation methods for stock analysis. P/E ratios are used when companies have relatively stable earnings and there are a number of comparable companies in the local market. Banks are often valued according to P/E ratios.

Net realisable value – is used for stock analysis when things get gloomy. An analyst will value a company according the amount the company’s assets are worth if sold (rather than the earning these assets generate) when the company is making sustained losses or is close to liquidation.

These methods mentioned above are all types of fundamental analysis, the pursuit of getting to the “fundamental” heart of a stock and analyse its worth.

Fundamental analysis observes the way a company runs – analysing the financial data that is “fundamental” to a company – its earnings, its profits, its dividends.

On the other hand, many traders instead use technical analysis, which involves analysis of stock charts in order to determine an understanding of the way prices move.

There is no “right” way in terms of approaching stock analysis, though most analysts will use a combination of both fundamental and technical analysis in their approach.

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The S&P/ASX 200 index (also known as the XJO) is the main benchmark for the Australian equity market (replacing the venerable All Ords as the industry standard).

The index is made up of 200 of the top stocks, which boast a total value of around $1.1 billion (end of March 2010).

While there are around 2000 stocks listed on the ASX, these top 200 stocks make up almost 80% of the total value of the market.

The XJO provides investors and fund managers with a benchmark, a level of performance to compare their own Australian share trading to.

The index also forms the basis for futures contracts such as the Share Price Index (SPI).

Piece of the pie

The index is weighted by the float-adjusted market capitalisation of each stock, which means a 1% move in one of the bigger companies, moves the index more than a 1% move in a smaller company.

The finance sector makes up around a third of the index (by market cap, not number of companies), mostly through the big four banks.

Around 25% of the index is made up by mining stocks, and BHP, the market’s biggest stock, accounts for around 12-13% of the index just on its own.

Wild ride

Started up on 31 March, 200, the XJO began with a value of 3133, which was the value of the All Ordinaries at the time, and there has been plenty of action since then.

The XJO hit a low of 2693 in March 2003, just before the start of a bull market.

Over the next four and a half years, the XJO rose by over 150%, hitting a high of 6852 in November 2007.

This is when the global financial crisis (GFC) kicked in, sending the XJO spiraling lower over the next 18 months.

After hitting a GFC low of 3120 in March 2009, the XJO rose by around 50% over the next 12 months.

This party is invite only

To be eligible for inclusion in the ASX 200 index, a stock must meet market capitalisation, liquidity and listing criteria.

Market capitalisation is determined using a function of current index shares, the latest stock price and the investable weight factor (known as IWF).

IWF is negatively impacted by strategic holdings that are corporate, private or government in nature, meaning shares owned by founders, directors of the company and other companies are excluded.

The liquidity requirement for inclusion in the ASX 200 is that the trading volume (in dollar value terms) and the number of stock transactions must be higher than 0.025% of the total trading volume of all eligible securities.

Lastly – and this goes without saying – a company can only be listed on the ASX 200 if it is listed on the Australian Stock Exchange (ASX).

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In stock analysis, Japanese candlesticks are one of the most popular ways to display price information which includes the open, close, range and direction of trade for trading instruments such as equities and currencies. It was known to be developed by Homma Munehisa, a successful Japanese rice trader in the 18^th century.  The Japanese Candlestick makes price charts visually easy to read and understand, making it a favourite amongst traders, chartists and technical analysts.

A Japanese Candlestick resembles an upright rolling pin as it is composed of a body and two wicks (or shadows) on each side of the body.

The body represents the opening and closing price for the period. If the instrument closed higher than it opened, the candlestick should often be a white, blue or green colour to highlight an upward movement over the specified period. If the instrument closed lower than it opened, it should represent a black or red coloured body.

The wicks above and below the body (if it exists) represent the price range the instrument has traded over the specified period.  The longer the wicks, the larger the range the price of the instrument has traded.

How are they used?

Candlesticks can formulate different price patterns which can be used to help predict the trend of a security, and this is an important concept in stock analysis. There exist specific names that are attached to different types of candlesticks that display different lengths of body and wicks. Generally, they can be used as a timing tool to get into or get out of a trade.

A bullish signal is usually given if the lower wick is much longer than the upper wick, known as a ‘long lower shadow’ while a bearish signal is usually given if the upper wick is much longer than the lower wick, known as the ‘ long upper shadow’.

Additionally, if a bull run would follow a ‘long lower shadow’, it would be reflected by higher highs and higher lows as well as candlesticks with white bodies without wicks which are called ‘white marubozus’. Conversely in a bearish market, a downtrend would be represented by lower highs and lower lows with perhaps black bodies without wicks known as ‘black marubozus’ occurring after a ‘long upper shadow’.

So, when conducting stock analysis using charts, remember that Japanese candlesticks provide more information about price patterns than a normal line chart.

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One common way to classify stocks is to make an assessment as to whether they are “cyclical” or “defensive”.

These two terms represent, as you can probably guess, two types of industry or stock that are at stark odds with the other.

Let’s take a deeper look at what these terms mean, and how they interplay with the stock market.

The terms cyclical and defensive are used to show how closely correlated a company’s share price, or a sector’s performance, is to fluctuations in the economy.

Cyclical stocks are those whose fortunes are tied to the strength of the economy. They perform well when the economy is strong, and will decline when the economy is performing badly.

In other words, cyclical stocks perform according to the big picture, where as defensive stocks generally perform solely on their own merits.

In general, defensive stocks tend to offer more steady products and services. Business doesn’t necessarily boom when the economy is strong, but also doesn’t suffer too badly when the economy is struggling.

Defensive stocks are non-cyclical because they experience solid profits regardless of the motions of the broader economy.

Defensive stocks, as we noted above, are not considered to be tied to the market. However, their fortunes are still party tied to how the broader economy is going.

Defensive stocks are seen as safer, and should perform better in a bear market. Even if they don’t manage to go up during a bear market, they shouldn’t fall by as much as cyclical stocks in bad times.

Because defensive stocks and cyclical stocks are polar opposites, when cyclical stocks are doing poorly, defensive stocks tend to do well.

An example of defensive stocks to choose in a bear market would include those that are in the healthcare industry, namely CSL Limited which is a biopharmaceutical company.

Additionally, other sectors that are generally considered most defensive in a bear market are officially known as the consumer staples and the utilities.

Generally, some experts believe defensive sectors include industries such as drugs, healthcare, information technology and food on a wider spectrum.

Defensive stocks are defensive in nature because the demand for them tends to be strong no matter how the general economy is performing. This is because defensive stocks produce items considered necessities, and product demand should continue regardless of the big picture.

For instance, people will always need electricity in their homes, so utilities companies tend to perform steadily over time; it’s not like you will buy twice as much electricity when times are good!

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There are two ways to make money out of shares. The most obvious is when you sell a stock for more than you buy it for. That’s called capital gains, and that garners most people’s attention. This usually occurs when the Australian stock market is in a bull market.

The other way of making money is less glamorous, but just as important. When you own shares in a company, you literally own a small slice of the company. Typically, when a company makes a profit, it distributes the money to its owners. You, as a shareholder, are one of the owners (admittedly usually a small one) and this money is called a ‘dividend’. This is an important point to consider when buying shares.

Now almost all of you will know what a dividend is, but not everyone knows about the dividend yield. The dividend yield is simply the total dividends for the year expressed as a percentage of the share price.

Dividend yield = annual dividends (in cents) / share price (in cents)

For example if you put $1000 into the bank, and you receive $60 in interest for the year, then the return or ‘yield’ is 6% ($60/$1000). The same goes for dividends. If you invest $10,000 in a share, and you receive $300 of dividends, that’s equal to a yield of 3%.

One of the high dividend stock picks were Macquarie Infrastructure (MIG) and Tabcorp (TAH) with a dividend yield of 16.81% and 9.23% respectively. Usually, Blue Chip Stocks provide a fairly high dividend yield.

A company can pay virtually whatever dividend it wants, from nothing up to a maximum of around 10%. Most companies pay between 2% and 5% and the average across the entire market is currently around 3.7%.

For example in the Australian Stock Market, Amcor (AMC) is a fairly high yield stock which had a dividend yield of 5.8%. It went ex-dividend on 2 March 2010 which does not entitle a new investor to the dividend declared if they purchased the share on the ex-dividend date.

Broadly, companies fall into two categories – growth and income. Growth stocks are companies that are expanding and don’t pay out much of their profits in dividends, because they need the money to grow. Mining stocks often pay out little in dividends.

Income stocks are more stable companies that pay out regular and predictable dividends. Banking stocks and property trusts generally pay a high dividend yield of around 5% or higher.

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On Saturday February 27, a powerful earthquake struck Chile, causing a significant loss of life and damage to the country’s infrastructure.

The earthquake also had the effect of disrupting commodity markets, in particular the market for copper.  This is an important concept when doing stock market research.

Commodity prices are sensitive to a number of different factors.  Demand for commodities is one factor that can drive up commodity prices.

Another factor is a disruption, or threat of disruption, to the supply of commodities.  In economics, a shortage of supply leads to higher prices for a good.

Commodity markets work in a similar fashion, as a shortage in the supply of a resource tends to bring up its price. This highlights the importance of economic fundamentals in any stock market research.

Chile accounts for 30% of the world’s copper reserves, and its share of global production is 35%.  This makes Chile an important player in the market for copper.

When the earthquake struck there were reports that the country had suspended some copper production.  However, most copper mining was done in areas outside of the quake zone, so production was not materially affected.

This didn’t stop copper prices from soaring after initial reports of the earthquake, as the mere threat of a copper shortage was enough to drive up its price.

So when conducting stock market research, remember that there doesn’t need to be an actual disruption in commodity supply for prices to rise, just the threat of disruption is enough.

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