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Fundamental analysis is used to figure out an asset's real worth by looking at its internal data.

There are many things you can look at, such as financials, competitive advantages, management, potential growth, etc.

A thorough investigation takes time and expertise. Fortunately, as a swing trader, much of it is irrelevant and is best left to the long-term investor.

There are, however, a few fundamentals that are helpful to understand.

Total revenue is a measure of a company's total sales.

When revenue is growing steadily year over year, it usually signifies company growth, and the opposite is true also.

Likewise, growing company profits usually mean rising share prices.

A good rule of thumb for any trader is to trade with the trend. If a company's total revenue is falling, you don’t want to go long on it.

Earnings per share (EPS) shows how much profit is attributed to each share of stock. It is used to compare the profitability of different companies.

Earnings are not the same as profits.

Earnings are calculated by subtracting direct production costs from total revenue. Profit is revenue minus all expenses.

To get the earnings per share figure, divide the total earnings by the number of shares outstanding.

If there is expected growth in EPS, the stock price will usually increase.

The price to earnings ratio (P/E) is often considered the most important fundamental indicator for a stock's movement.

It tells you how the market is pricing a company’s shares in relation to its earnings.

To calculate it, divide the company's price per share (P) by its earnings per share (E).

Use the P/E to compare a company's value to other companies in the same sector.

Debt is borrowed money. Perhaps a company borrowed it for starting capital or to boost growth.

Equity is what shareholders have put into the company via the buying of shares.

Generally speaking, a good company should have more equity than debt. Look for companies that have a debt to equity ratio less than 1.

Return on Equity (ROE) tells you how much profit the company has generated with the shareholders’ money. It is expressed as a percentage.

Look for companies with higher ROE numbers. It is also important to check whether the ROE is growing or not. Growth is good.

When traders feel a stock is overvalued, the number of shares that get shorted (as opposed to going long) increases.

The float is how many shares there are available for shorting.

You can calculate the short interest percentage by dividing the number of shares shorted by the total float.

When the short interest is over 20%, it means a lot of traders feel negative about the stock, which can have price implications on the stock.

A hot sector mania is when a sector experiences abnormal growth in a relatively short period of time.

The dot com boom and Bitcoin are two well-known examples.

If you can identify them early enough, you can make big gains simply by buying in and riding the wave. If your cab driver or waitress is telling you about it, you are probably too late and should think about taking profits.

Hot sector manias are not as common as other setups, but they are worth keeping an eye out for as they can make your year.

Read the next chapter here.

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