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Stock-Picking and Technical Analysis: Basic Facts

When developing a stock-picking strategy, it’s vital to define the type of analysis. There are two types you can choose from: fundamental and technical.

Fundamentalists estimate the intrinsic value of a security, and there are more patience and monitoring involved. In contrast, technicians use indicators and chart patterns to predict future price moves. By using these tools, they can determine which strengths and weakness the stocks have.

Does it work?

Many experts claim that technical analysis does work – if you do it correctly. The idea is to see how the prices move on the market when they’re shaped by external factors. Those can be natural disasters, and even political events. Because of that, the prices are bound to change and show up in the results, and they can only go up or down.

Technical analysts believe that this method works because market prices always reflect certain information. In addition to that, trends influence their movement. Lastly, history tends to repeat itself, so there is a pattern they can follow.

Still, you can analyze the historical market action, but the analysis needs to be high-quality. Furthermore, the investor has to be able to respond to the results. The profitability depends on his abilities and the tools he uses while doing the analysis. Therefore, he must be agile and responsive so that he could make money.

 

Who can use it?

Anyone with a basic knowledge of price charts can do technical analysis. It’s even better if they use an online or mobile platform. However, it’s not usually the first choice for buy-and-hold investors. They prefer fundamental analysis, whereas active traders depend on the technical one. They aim to take advantage of the fluctuations, no matter if the market is rising or falling.

What are they interested in?

The main difference between the fundamental and technical analysts is the fact that the latter doesn’t care about the intrinsic value. Instead, they look at past data trends. In addition to that, they also do not care about business models or management. Hence, they sometimes make a huge profit by trading companies they know nothing about.

Is this a long-term strategy?

The purpose of this analysis is to benefit from the fluctuations. If a technician sees that his stocks are not doing so well, he will waste no time to exit his position. Usually, they use stop-loss orders to minimize their losses.

Depending on the direction and the information he’s getting, he can either go short or long on a stock.

In contrast, a value investor has to practice patience and wait for improvements on the market.

Supply and Demand

One of the most important concepts regarding this analysis is the movement of supply and demand. It’s shown through support and resistance.

By using these concepts, they can determine points where a trend may chance. It could go both ways – either pause or reverse itself.

Therefore, analysts will know whether or not there will be an opportunity to trade. If the price reaches a certain point (support or resistance), then there are two possible scenarios. Either the price will bounce back, or it will push through and continue advancing.

Whichever the case, investors can place a bet on the direction they think it will go. If they fail to predict it correctly, they can exit their position with a small loss. However, if they’re correct, the move might be substantial.

Tools

They can choose a public domain indicator or a commercially available tool. However, there are four basic types: trend, momentum, volatility, and volume indicators.

In addition to that, they can use a stock chart to monitor the price movement. That way, if the price goes above its 200-day average, they can quickly respond to it.

Also, they can also use a stock screener to search for financial instruments. The stock screener shows data and price patterns, and it’s based on metrics that were defined by its users.

By using this tool, technicians can input conditions which they would like their stocks to have. For example, they could search for strong volume gainers and high average crossovers.

 

The Most Successful IPOs of All Time

2016 was not a good year for initial public offerings. Only 105 companies made a debut on the U.S. stock exchanges, which represents a decline of 40% from 2015. In addition, it was a failure that hasn’t happened since the 2009 financial crisis.

A question arises: what happened and why did IPOs vanish? Some experts believe that the companies gained access to capital in the private market. However, they also think that general concern about the election and Brexit also played a certain part.

Nevertheless, the next few years could be different. A few of the high-profile IPOs that had a decent success might influence others to go public.

Still, it is too soon to tell. Therefore, let’s take a look at some of the most successful IPOs of all time.

Alibaba – 2014, $21.8 billion

While you might have expected an American company to hold the first place, the title belongs to Alibaba. This internet giant wasn’t well-known in America before their IPO, but that all changed in 2014.

They decided to list their American depositary shares on the NYSE, with a $68 offering price. The market value of the largest e-commerce company in China was $168 billion – three times more than eBay’s.

During the first day, their stock surged 38%, making its founder, Jack Ma, the wealthiest man in China.

Visa – 2008, $17.9 billion

 

Although March of 2008 wasn’t the best time to go public, credit card company Visa raised almost $17.9 billion. In contrast, Mastercard raised seven times less when they went public in 2006.

In addition, they used a part of the proceeds to redeem shares owned by a consortium of banks which also held Visa.

Enel Spa – 1999, $16.5 billion

 

Apart from Alibaba, another foreign company appears on our top five list. In 1999, power company Enel appeared on both the Italian Stock Exchange in Milan and the NYSE. They became the third most significant IPO in the United States. Furthermore, the most interesting thing about them was the fact that they were also a government-owned business.

The Italian government needed to pay a debt, so they decided to sell a third of the company. However, by 2007, the company was removed from the New York Stock Exchange due to low trading volume.

Facebook – 2012, $16 billion

Even though it had issues from the start, Facebook was one of the most anticipated IPOs of all time. After its founding in 2004, Mark Zuckerberg’s social network amassed more than 800 million users by 2012.

This company also defined the social era of the Web, as said by New York Times. Furthermore, their initial offering was $38, and their market value was $104 billion – more than Amazon and McDonald’s.

However, due to some problems with the Nasdaq stock exchange, some of their underwriters had to prevent the stock from falling below those $38. Because of that, they had to buy some shares.

General Motors – 2010, $15.8 billion

 

Before General Motors added themselves to the list of the most successful IPOs, they went through bankruptcy.

After a year and a half of problems, they emerged on the NYSE in 2010. Their CEO, Dan Akerson, rang the opening bell, and everyone could hear the revving engine of a Chevrolet Camaro.

However, the biggest seller in this IPO was the government of the United States. Back when the financial crisis happened, General Motors had to take a $50 billion bailout in order to stay active. Therefore, the IPO was a step made by the U.S government to compensate for their investment. The U.S. Treasury, however, sold their last shares by 2013.

Using Income Investing As a Stock-Picking Strategy

Steady income is what most investors are after. However, due to low yields in the recent years, it has been tricky to create significant returns. Some securities have a fixed income, like bonds and CDs. However, income investors are looking for more opportunities. Thankfully, there are many dividend-paying stocks they can choose from.

Which companies pay dividends?

There are young companies that are looking to grow, and older, already established ones. However, only some of them may pay dividends if they want to.

There are three options they can choose from: pay dividends to their shareholders, reinvest the profit, or do both things at the same time. Younger companies tend to stay away from dividends because they want rapid growth.

In addition, even bigger, older companies also avoid dividends – Berkshire Hathaway, for example. Typically, companies that pay dividends are usually the ones that have stopped growing, having already left the rapidly advancing industries.

What is a dividend yield?

A dividend yield is the amount of the yearly dividend which shareholders can expect. The higher it is, the better the income. However, if the income is over 20%, it might be too risky to pursue.

For example, if ABC trades their stocks at $50 per share, they could also have an annual dividend of $5 per share. Therefore, their dividend yield would be 10%. But, if they trade the shares at a higher price, the dividend yield would be smaller.

In the real world, you can expect a dividend yield of about 2% to 5%, and it usually depends on the sector you are looking at. Many income investors try to find those that have higher yields, but they have to be careful. The dividend yield has to give them a steady income over many years to come.

 

Johnson & Johnson

A fantastic example of a company that paid dividends regularly is Johnson & Johnson. From 1963 up to 2004, they increased the yield every year. If you had bought a stock in 1963, that would mean the dividend yield would have grown at least 12% every year.

After 30 years, you would have a 48% annual return for those same shares you bought in 1963.

However, if you want such results, you would have to do some proper research. Finding a good income investing stock is not for the faint-hearted. Before you decide on one, try using a stock screener to find out which company has the highest dividend yield. After that, you could use fundamental analysis for further research.

Don’t rely solely on dividends

Just like other strategies, this one also doesn’t have a “one size fits all” formula. Finding a fantastic company that gives high dividends is not easy – and it can also be risky.

Just because the dividend yield is high, it doesn’t mean that it is a good company. After all, those dividends are coming from the company’s income. Furthermore, sometimes it is better to reinvest and enhance the growth than pay out high dividends.

In addition, you cannot rely just on a stock scanner for this purpose. You would need to have proper knowledge about income investing so that you could reach the right decision. Apart from that, your personal judgment plays a part too.

Dividends can also be risky

If you thought that this would be easier and that you could lower the risk, but still make an income – think again. Any risk that we can connect to equity security is the same as the one we can apply to high dividend yields. However, you can avoid problems by picking solid, established companies.

You cannot avoid taxes

Another important thing to remember is that, in most countries, dividends are taxed just like your wages. In addition to that, you would have to pay a higher tax bill for them than for capital gains. Therefore, this might actually lower your return significantly.