Welcome to stock investment fundamentals. To succeed in stock trading, you need three core skills: reading financial statements, analyzing company fundamentals, and performing proper valuation. These skills help investors make informed decisions rather than gambling on price movements.
The balance sheet is the foundation of financial statements. It shows a company's financial position at a specific point in time. Assets represent what the company owns, liabilities are what it owes, and equity is what belongs to shareholders. The fundamental equation is: Assets equals Liabilities plus Equity. This equation must always balance.
The income statement shows a company's profitability over a specific period. It starts with revenue from sales, subtracts operating costs and expenses, to arrive at net profit. Key metrics include gross margin, which is revenue minus cost of goods sold, and net margin, which shows final profitability. These ratios help investors assess operational efficiency.
There are two main approaches to stock valuation. Relative valuation uses ratios like Price-to-Earnings, comparing stock price to earnings per share. Absolute valuation uses Discounted Cash Flow models, calculating the present value of future cash flows. A P/E of 10 means investors pay 10 times annual earnings. DCF considers the time value of money by discounting future cash flows to present value.