Part 26 Technical Analysis – Initial balance

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

Technical Analysis Strategies for Beginners

Many investors analyze stocks based on their fundamentals – such as their revenue, valuation or industry trends – but fundamental factors aren’t always reflected in the market price. Technical analysis seeks to predict price movements by examining historical data, mainly price and volume.

It helps traders and investors navigate the gap between intrinsic value and market price by leveraging techniques like statistical analysis and behavioral economics. Technical analysis helps guide traders to what is most likely to happen given past information. Most investors use both technical and fundamental analysis to make decisions.

Choose the Right Approach

There are two different ways to approach technical analysis: the top-down approach and the bottom-up approach.   Often times, short-term traders will take a top-down approach and long-term investors will take a bottom-up approach.

  • Top-Down. The top-down approach is a macroeconomic analysis that looks at the overall economy before focusing on individual securities. A trader would first focus on economies, then sectors, and then companies in the case of stocks. Traders using this approach focus on short term gains as opposed to long term valuations. For example, a trader may be interested in stocks that broke out from their 50-day moving average as a buying opportunity.
  • Bottom-Up. The bottom-up approach focuses on individual stocks as opposed to a macroeconomic view. It involves analyzing a stock that appears fundamentally interesting for potential entry and exit points. For example, an investor may find an undervalued stock in a downtrend and use technical analysis to identify a specific entry point when the stock could be bottoming out. They seek value in their decisions and intend to hold a long term view on their trades. (For related reading, see: Bottom-Up and Top-Down Investing Explained.)

In addition to these considerations, different types of traders might prefer using different forms of technical analysis. Day traders might use simple trendlines and volume indicators to make decisions, while swing or position traders may prefer chart patterns and technical indicators. Traders developing automated algorithms may have entirely different requirements that use a combination of volume indicators and technical indicators to drive decision making. 

Balance Sheet explained in detail

August 25 2020 Written By: EduPristine

What is Balance Sheet ?

A balance sheet (also called the statement of financial position), can be defined as a statement of a firm’s assets, liabilities and net worth. It provides a snapshot of a business at a point in time. These are prepared at the end of an accounting period like a month, quarter or year end. Comparison of balance sheets over years helps to gauge the financial health of a business. It got its name as assets minus liabilities (net assets) must equal the owner’s equity (they must balance). Every business will generally need a balance sheet while applying for loans or grants, submitting taxes or seeking potential investors.

Balance sheet is based on the formula: Assets = liabilities + Net worth

Components of the Balance Sheet

The three major components of the balance-sheet that indicate what the company owns and owes are Assets, Liabilities and Owner’s Equity.

Assets can be defined as the valuables that the company owns to benefit from or are used to generate income. They are the resources of the company that have future economic value. These are categorized into tangible and intangible assets. The tangible assets are further bifurcated into current, long term and other assets. The non tangible assets are trademark, copyrights, goodwill to mention a few.

Current assets include the cash, accounts receivable, prepaid expenses and all that can be converted into cash within a year.

Long term assets are also called fixed assets. They are distinguished from the current assets due to their longevity in generating revenues. All fixed assets except for land are shown on the balance-sheet at original cost less depreciation.

Liabilities are debts owed by the business. These are claims of the creditors against the assets of the business. These are claims or obligations that arise out of past or current transactions. Liabilities are classified into current and long term liabilities.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

Current liabilities are accounts payable, accrued expenses, taxes payable, the current due within one year portion of long term debt and any other obligations due within a year.

Long term liabilities are debts that must be repaid by the business in more than one year from the date of the balance sheet.

Net worth (Owner’s Equity): Owner’s equity (called when it’s sole proprietorship) sometimes is also referred to as the book value of the company because owner’s equity is equal to the reported asset minus the reported liability.

Assets = liabilities + Net worth, this can be reposed to yield the definition of net worth, which is the balance after the liabilities are subtracted from the assets of the business.

This section of the balance sheet includes:

  • Paid up capital
  • Retained earnings
  • Treasury stock

Preparing a Balance Sheet

The two most common formats of reporting the balance sheet are the vertical balance sheet (where all line items are presented down the left side of the page) and the horizontal balance sheet (where asset line items are listed down the first column and liabilities and equity line items are listed in a later column). The vertical format is easier to use when information is being presented for multiple periods.

Example of Balance Sheet

What can be analysed from a Balance Sheet?

  • The general financial state of the business at a specific point in time
  • The amount of capital retained in the business
  • The productivity, growth and solvency of the business
  • The pace at which the assets can be converted to capital

Advantages of reporting the balance sheet

  • Business snapshot:

Balance Sheet provides an accurate picture of the business status. While the profit and loss statement provides the profit made in a transaction, balance sheet gives the details of the bills the business owes to the vendors. Every balance sheet is unique; while a business may experience a high profit account, it can simultaneously have a poor balance sheet if the total net asset value is low and vice versa. Balance sheet determines the financial strength of a business and helps in future financial planning.

  • Provides information for apt decision making:

Balance-Sheet provides the investors and potential lenders with the information needed to take decisions while lending money or resources. It reflects the company’s ability to collect and pay debts on time. On the basis of this, one can form an opinion of the company’s risk and return prospects.

  • Provides helpful financial ratios:

Balance Sheet helps to calculate the ratios to determine a company’s long-term profitability and short-term financial outlook. Ratios like the current ratio and the acid test or liquidity ratio are calculated using information from the balance sheet. These ratios help obtain a very thorough summary of the company’s financial health by analyzing its cash position, working capital, liquidity and leverage. It also provides insight into the company’s likelihood of defaulting on its credit obligations or even its bankruptcy risk.

Disadvantages of the balance sheet

  • Numbers could be misleading:

As the balance-sheet gives the financial snapshot at a given point of time, it could be misleading sometimes. For e.g. the analysis could get distorted if the company’s cash position at year end is high, indicating high reserves, but the company may intend to distribute it in the form of dividends.

  • Doesn’t give true value of assets:

The balance sheet does not provide the true value of the assets as they are reported at the historical costs. It does not reflect the current market valuation.

The balance sheet has some of the current assets valued on estimated basis, so it does not reflect the true financial position of the business. Also there is complete omission of the valuable non monetary assets from the balance-sheet.

Balance-sheet is one of the essential financial statements needed to take appropriate and sound financial decisions. Blended with the other components (Profit and Loss Statement, Cash Flow Statement and Statement of Owner’s Equity) of financial reporting, one can decide whether the business under focus is right as an investment option.

The Main Focus Points When Analyzing a Balance Sheet

Fundamental analysts, when valuing a company or considering an investment opportunity, normally start by examining the balance sheet. This is because the balance sheet is a snapshot of a company’s assets and liabilities at a single point in time, not spread over the course of a year such as with the income statement.

Why Balance Sheets are Important to Analysis

They say that “the numbers don’t lie,” and that is true more for financial analysis than anything else. Balance sheets are important for many reasons, but the most common ones are: when a merger is being considered, when a company needs to considering asset liquidation to prop up debt, when an investor is considering a position in a company, and when a company looks inward to determine if they are in a stable enough financial situation to expand or begin paying back debts.

Many experts consider the top line, or cash, the most important item on a company’s balance sheet. Other critical items include accounts receivable; short-term investments; property, plant, and equipment; and major liability items. The big three categories on any balance sheet are assets, liabilities, and equity

Important Assets

All assets should be divided into current and noncurrent assets. An asset is considered current if it can reasonably be converted into cash within one year. Cash, inventories, and net receivables are all important current assets because they offer flexibility and solvency.

Cash is the headliner. Companies that generate a lot of cash are often doing a good job satisfying customers and getting paid. While too much cash can be worrisome, too little can raise a lot of red flags. However, some companies require little to no cash to operate, choosing instead to invest that cash back into the business to enhance their future profit potential.

Important Liabilities

Like assets, liabilities are either current or noncurrent. Current liabilities are obligations due within a year. Fundamental investors look for companies with fewer liabilities than assets, particularly when compared against cash flow. Companies that owe more money than they bring in are usually in trouble.

Common liabilities include accounts payable, deferred income, long-term debt, and customer deposits if the business is large enough. Although assets are usually tangible and immediate, liabilities are usually considered equally as important, as debts and other types of liabilities must be settled before booking a profit.

Important Equity

Equity is equal to assets minus liabilities, and it represents how much the company’s shareholders actually have a claim to; investors should pay particular attention to retained earnings and paid-in capital under the equity section.

Paid-in capital represents the initial investment amount paid by shareholders for their ownership interest. Compare this to additional paid-in capital to show the equity premium investors paid above par value. Equity considerations, for these reasons, are among the top concerns when institutional investors and private funding groups consider a business purchase or merger.

Retained earnings show the amount of profit the firm reinvested or used to pay down debt, rather than distributed to shareholders as dividends.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

Like this post? Please share to your friends:
Binary Options Guide For Beginners
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: