Due Diligence & Day Trading

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Due Diligence & Day Trading

Before you dive into day trading and start buying and selling your stocks you need to know something about the companies and stocks that you are day trading.

Reviewing Your Companies
Professional traders use a variety of methods to pick the companies they invest with. They also use a range of methods to determine when to buy and sell stock from those particular companies.

Fundamental analysis is one of the most basic and effective methods for reviewing stock and making smart investment decisions. The process involves looking at a business at its most basic financial level.

Many experienced investors use fundamental analysis in combination with other tools to evaluate stocks. However, a large number also use fundamental analysis on its own to make investment decisions. The goal of all traders is to determine the current worth of a stock and, most importantly, how the market values the stock.

Company Earnings - The first thing you need to look at is earnings. This is one of the best ways to determine how much money a company is making and how much it is going to make in the future.

Earnings are one of the most fundamental indicators of company profits. This may be complicated to calculate, but with practice, you will become better at reviewing specific details like this.

The key points about earnings:

An increase in earnings generally leads to a higher stock price and, in some cases, a regular dividend

A decrease in earnings generally leads to lower stock prices and a fall in dividend.

Earnings are a strong indicator of the direction the company’s stock is going.

Earnings Per Share
(Earnings Per Share is determined by dividing the Net Earnings among the Outstanding Shares.)

Unfortunately, there is a problem in focusing on earnings alone as a way to understand and compare stocks from one company to another, which, at some point, every trader must do.

Comparing the earnings of one company to another is a very limited method and doesn’t really make much logical sense. If company A is a multimillion dollar corporation and company B is a small business operating in a small area with only a small staff, it doesn’t make much sense to compare the earnings of company A with company B to determine which has the best stock. Using the raw numbers overlooks the likelihood that the two companies have a different number of outstanding shares.

If company A and company B both earn $1000 over a quarter but company A has only 10 shares outstanding and company B has 50, you would find the following:

Company A Earnings Per Share = $1000/10 = $100

Company B Earnings Per Share = $1000/50 = $20

According to the Earnings Per Share (or EPS), company A is a better investment. And while you shouldn’t make a determination based on the earnings or the EPS alone, you should review the three types of EPS numbers and factor them into your decision making:

Trailing EPS – last year’s numbers and the only actual EPS

Current EPS – this year’s numbers, which are still projections

Forward EPS – future numbers, which are obviously projections

There are many other methods for performing due diligence as a day trader. Develop your own style and stick to it.

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