Fundamental analysis of the stock market: choosing a sector

As part of the master class: "The stock market. Knowledge Slice". 

Fundamental analysis securities market is not limited to the ability to competently research the current news flow. However, someone who learns how to work on the news can be quite a successful stockbroker and not waste time looking for additional factors that sometimes only confuse the matter. But this is a certain skill, and it is given with time. At the initial stage it is better for a trader to have several justifications for buying or selling shares.

Analysis of economic sectors in the fundamental forecast

Let's familiarize ourselves with one more way to pick stocks - this is analysis of promising and weak industries. You may think that only long-term investors may be interested in finding such. It's not! It is also important for speculators to know which stocks may look stronger and which may look weaker over time.

Information for industry research is taken from the primary source - the issuer (company). It does not hurt to observe the assessments of major rating agencies and respected experts.

Attractive sectors for investment in Russia

So, what in Russia makes this or that industry more attractive or, on the contrary, more repulsive for stockbrokers?

First of all, of course, government initiatives, reforms and restructurings. Even if you are not a trader, you know that few reforms since the 2000s in Russia have been finalized. And participating in games with the state is the easiest way to get hurt.

For example, in 2008, all the media shouted that this year on the stock market was the year of "energy". The reform of RAO UES was underway. But traders were "forgotten to warn" that this "year of energy" is not for those who work for the increase of shares in the industry. The holding was crushed, and everything that could be sold abroad. Then came the realization that the system could not exist as a separate mechanism. Unions and high-profile mergers began again.

The risks of a stockbroker in such turmoil are obvious. Not only can he lose money due to changes in the exchange rate value sharesBut at some point you will be left with illiquid assets on your hands, because in Russia there is a practice to withdraw shares from stock exchange trading in the process of reforms. In principle, this practice is also found abroad, but on the developed markets A trader knows clearly when he can actively trade this paper again, while with us the process of registration and re-registration can drag on for months.

Second, interest in the industry may be influenced or reduced by global background. There are many things that can have an impact here, from duties and embargoes to natural disasters and wars. In order to capitalize on a new factor affecting the industry, it is important to exercise restraint. Evaluate how much of the news is already priced in, how long the anticipation has been in the air.

Here is a Russian example, but with an international connotation. Many traders were waiting for Russia's accession to the WTO as a signal for the growth of investment interest in securities of the metallurgical sector and the chemical and petrochemical sector. But they were disappointed. Over the long history of Russia's attempts to join the WTO, the main growth factors have already been absorbed into prices, or have become irrelevant.

An interesting way to use industry analysis suggests Herbert Newton Cason in his book "The 12 Rules of Investing" (or "12 Rules for Handling Money or How to Make a Profit"). One of his tenets of investing is that it states: "Bet on an entire industry and follow the price fluctuations. There is always an industry that is in decline. It may be the manufacture of either cotton, or rubber, or iron, or oil, or wood, or jute. And there is always at least one firm in that industry that is known to be reliable, promising and well financed, a firm with a large reserve."

It's no secret that many traders are drawn to heavily depreciated stocks. But it is dangerous to buy them, as the industry may be pressured by some fundamental news and that is why the stock feels worse than the market. Once that news recedes into the background, the stock will certainly not fail to take advantage of it to recover. But how soon that will happen, and whether it will happen at all, is unknown.

In general, it is important not to forget that it is possible to make money both on the rise and fall of securities. A fall is traditionally quick. So, if your trading strategy involves the use of borrowed funds, you are facing a opens up horizons in many sectors of our marketplace.