Accounting For Investors
As an investor, you need to learn the basics of accounting because it is the language of business. The most popular investment types keep their finacial records using fincial accounting standards. (GAAP) Your goal as in investor is to become your own fincial analist. This is for your own protection even if you have a professional investment advisor.
Fundamental vs Technical Thought Process
This can be broadly defined as the study of charts. This is a methodology used by traders but it can be used by investors. There is the price action technician who uses naked charting. (no indicators) Then there is the analyst who uses indicators. Let’s be honest here. Technical analysis only works because someone else puts in the work on fundamental analysis. For investors, this is still recommended because it helps you find entry and exit points.
A fundamental analysis of an investment is through financial statements, news, major company changes, and financial ratios. A fundamental-minded investor will learn everything about a company. This allows the investor to make an informed decision.
Should You Learn Technical and Fundamental Analisis?
When you have two great tools, they should be used together. These can be used together to give you an investing edge. When you know a company at a fundamental level and combined that with technical analysis, you will understand the company and the market sentiment. You will know why the company moves on a fundamental basis and be able to use technicals for entry and exit points.
The Issues With Technical Analysis
- An analyst has to study the fundamentals to analyze the value of the company. This leaves room for errors from the market makers interpretation of the company. Technical analysis only works because someone else is doing the fundamental work.
- Bad companies with horrible fundamentals sometimes have great technicals. This happens a lot in stocks that are micro-cap (Trading For Less Than $5) because they are easy to manipulate. This can be done legally by institutional traders or can be a scam called a pump and dump. If you don’t understand the accounting process, you could be their next target.
- Companies will intentionally deceive you by reporting earnings with errors. Later they call it an accounting mistake. This is a problem that happens because there is a window of time before the financial statements are audited. As an investor, learning accounting will show you when something looks too good to be true.
- Financial New Travels Fast. The news about a sector or cooperation travels so quickly that you will have the advantage over the technical traders. Often times important news will change the direction of prices and trends extremely fast. There is a reason why indicators are called lagging indicators You should instantly be able to make the correct strategic decision.
Financial Accounting For Investors
Financial Accounting is a form of financial statements that publicly traded companies use to report their earnings and financial positions to their stockholders. There is a saying that a company has multiple sets of accounting records. One set of books is for taxes, one is for management, and the other is for shareholders. Often times these are reported differently.
Accounting for investors follows GAAP rules which are set by FASB and the SEC (these are defined below). This means accounting for investors conforms to rules set by these two government agencies. For this reason, every business school in Americal will teach student financial accounting as a required class.
The SEC (Security Exchange Commission) The security exchange commission requires all publicly traded companies to report their financial statements using GAAP (generally accepted accounting principles.)
The FASB (Financial Accounting Standards Board) The primary purpose of this rule setting body is to improve GAAP. They are a non-profit organization that has gained power after the stock crash of 2008. This board is composed of CPA’s who worked in the industry and want companies to report ethically. There were members of the FASB who warned of the danger of the events leading up to 2008, so they are here for your benefit as an investor.
Financial Ratios are calculated from the information on the financial statements. This makes them a tool that you should use to for analyzing companies on a fundamental basis. With mature companies, financial ratios will show trends in business performance. New and Mature companies can be benchmarked to their competition. This makes financial ratios a powerful accounting tool for investors.
Accounting For Investors Subjects
Our goal isn’t to make you an accountant. We do, however, want to keep this material up to college standards. The fundamental and accounting section will show you how:
- Will show you how to analyze financial statements
- Income Statements
- Balance Sheets
- Cash Flow Statements
- What Do External Auditors do?
- Laws relating to publicly traded companies
- Governing Agencies
- Financial ratio analysis