Fundamental analysis is the study of stocks and other securities by analyzing the company’s value, standard of living, size, management capability, financial stability and more. In this post we will understand what is fundamental analysis in stock market and how to conduct it.
Fundamental Analysis: An Introduction
Fundamental analysis has been one of the most popular analyses in the history of stock markets. In this analysis, you use economic and financial factors to evaluate a security’s intrinsic value. Macroeconomic and microeconomic factors can affect a security’s value too.
The main motive in a fundamental analysis should be to evaluate a security’s intrinsic value, and compare it to the current stock price of the security. Once this is done, the analyst can then determine if they believe the security is undervalued or overvalued.
Read More: How To Find Undervalued Stocks
Importance of Fundamental Analysis
A fundamental approach to stock analysis includes examining the fair value of a company. It also evaluates the health and performance of any organisation by checking its financial numbers.
By analyzing a company with fundamental analysis, you can come to a conclusion about the value of the stock and predict whether it will rise or fall in the future.
With stock analysis, you can get an understanding of the company’s business model, and management behavior. These are key factors in making a decision to invest in a company.
Comparison Of Fundamental Analysis With Technical Analysis
The first step to technical analysis is looking at charts, and determination of the intrinsic value begins with financial statements. In fundamental analysis, if a company is trading below its intrinsic value, it may be a good choice for investment. Technical analysts believe that a stock’s price already reflects everything that has or could affect the company.
In fundamentals analysis, the timeframe is often long-term as oppose to short. There are a lot of things that can affect the stock market in terms of intrinsic value in long-term periods such as an economic downturn. Technical analysts follow the trend of stocks in shorter intervals like hours, days or weeks.
Technical analysts rely on short-term, medium-term trades to generate profits, while fundamental investing relies on making long-term investments.
Types of Fundamental Analysis
Fundamental stock analysis can be categorized in two types –
1. Quantitative
Quantitative analysis uses numbers and amounts to show how a company is doing. This type of analysis often looks at the P/E, P/B, and debt-to-equity ratios.
This analysis helps you discover investment opportunities such as when to buy and sell securities. This can be done by using simple statistical data or complex calculations.
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2. Qualitative
She uses both qualitative and quantitative analysis, where she evaluates the central company’s information related to its management experience, performance, corporate governance and other factors.
Quantitative as well as qualitative analysis is necessary in the research process; both data types are important.
How To Do Fundamental Analysis of Stocks
1. Know The Company
It is very important to understand the company before investing in it so that you have the necessary information about it. To gain this information, visit their website and look into things such as management, promotion, and products.
2. Analyse Financial Reports Of The Company
Once you have finished your understanding of the company, start looking at their financials. You can find information on things like the balance sheet and profit-loss statements. If the company is experiencing positive sales with a consistent net profit, this could be a sign that the company is doing well.
3. Debt
Avoid companies with high debt. The company’s performance will only be poor. Any security will perform bad if it has a huge debt of its own. Always try to find a security which has a low debt-equity ratio.
Read More: Most Important Financial Ratios To Analyze A Company
4. Look For Competitors
Find a company with better future prospects, such as new projects or upcoming plans. They need to be performing better than their peers.
5. Future Prospects Of The Company
Fundamental analysis is most effective when you want to invest for the long term. Invest in companies whose product will still be desirable 15-25 years from now.
6. Keep Reviewing From Time To Time
Monitor the financial performance of a company that you have invested in, and sell the security if there is a problem.
Conclusion
Fundamental analysis is often misunderstood to be a practice used solely by experts and professionals, when in fact it can provide any investor with valuable insight into the markets.
Read More: How To Get Balance Sheet Data
