Why you shouldn’t trade stocks with fundamental problems

Why you shouldn’t trade stocks with fundamental problems

Jun 4, 2020 | 0 comments

Many traders, particularly those who focus on buy-and-hold strategies, rely on the fundamental analysis of a company’s profile to determine what stocks they should buy or sell. Creating a profile of the company, including its cash flow, return on assets, conservative gearing, history of profit retention for funding future growth, the soundness of its capital management, etc, can provide a sense of the perceived value of a stock.

Because fundamental analysis is often complex and time consuming, many traders put it on the back burner, however, understanding a company’s fundamentals can give you an edge, and paying attention to a company’s weak fundamentals, can save you from throwing money into the abyss. Below, some redflags to keep an eye on:

Redflag #1: Shaky earnings 

One of the major reasons linked to fundamental analysis for which an investor purchases a stock is because of its earnings. 

The bigger the pie a company bakes, the more likely investors are to want to get a slice. 

A company’s earnings are a telltale sign of how the company is performing. A company that cannot generate a decent profit, is unlikely to have the ability to grow investors’ money as well. 

Redflag #2 Negative analysts report  

Analysts reports are another important fundamental of a company’s stock value. 

Though combing through various analysts reports shouldn’t be the only way to check a

company’s stocks health, it can give you an idea on how a certain company is performing and how its value is perceived in the market. 

If the majority of established analysts reports paint a gray picture on a company, this may be a sign that you should be wary about this stock and should dig deeper for potential risks. 

Redflag #3 Negative media coverage  

Reports from financial and news networks are an important indicator of a company’s current state of health. 

Investors should keep updated with news reports about a company’s financial conditions to determine if it’s currently in a good state to grow investors’ money. 

Media coverage also serves as a ‘fire alarm’ to alert investors of potential downturns. 

Redflag #4 Lack of a P/E Ratio 

Price to Earnings Ratio (the relation between a company’s earnings and its earnings per share) is also an important fundamental that investors should closely look at. 

The lack of P/E ratio in a company might mean they don’t have earnings or may be losing money since they have nothing to put in the ratio’s denominator. 

Conclusion 

Indeed, sailing on the rough and wide sea of trading is a rewarding venture, but only those

who take time to learn its intricacies and who are passionate about it have the chance to come out victorious. 

A stock’s fundamentals, or in this case, its fundamental problems are one of the most important

things that you should take time to learn, to make your stock venture as rewarding as possible.

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