The fundamental analysis assesses a security’s true value and compares it to the current stock price to identify potential overvaluation or undervaluation. It considers both qualitative and quantitative factors for informed investment decisions.
Introduction
There are two main ways to research securities and make investment decisions: fundamental analysis and technical analysis. While we’ve already talked about technical analysis earlier, let’s dive into fundamental analysis. This method involves studying a company’s financial health to determine its investment potential. With some practice and study, you can learn how to do the fundamental analysis yourself.
What is a Fundamental Analysis?
The Fundamental Analysis is the core aspect when it comes to analyzing and studying the history of the Company’s Financial status. When determining an intrinsic value like economic, financial, qualitative, and quantitative factors, Fundamental Analysis comes in place to evaluate the securities. The securities value is believed to be affected by the factors like macroeconomy and microeconomy. Economic conditions, industry conditions, financial conditions, and management proficiency comes in these factors. When conducting fundamental analysis, the primary goal is to assess a security’s true or inherent value and then compare it to the current stock price. This helps in determining whether the security is priced lower (undervalued) or higher (overvalued) than its actual worth.
Types of Fundamental Analysis.
There are two types of Fundamental Analysis:
- Qualitative Analysis: Qualitative analysis examines the non-numerical aspects of a company, such as its reputation, customer demand, competition, and management quality. It looks at the intangible factors that can affect a company’s success in the market. Qualitative analysis involves making judgments and interpretations based on the available information, so it can be subjective.
- Quantitative Analysis: Quantitative analysis deals with the measurable aspects of a business. It relies on financial statements, statistics, and data to evaluate a company’s financial health. This analysis considers factors like balance sheets, cash flows, debt, and financial ratios to assess how well the company is performing and determine the value of its shares. It focuses on concrete numbers and figures to understand the company’s overall financial picture.
Difference Between Fundamental Analysis & Technical Analysis.
They both have their own purpose and their Analysis:
| Pointers | Fundamental Analsysis | Technical Analsysis |
| Meaning | Fundamental analysis involves studying factors that influence industries, companies, financial statements, and competition to make informed investment decisions. | Technical analysis involves analyzing charts and patterns in the stock’s share price to make predictions. It relies on data and helps to identify trends and patterns in share price movements. |
| Purpose | Investment | Trading |
| Time Period | Long Term | Short Term |
| Aims | The aim is to determine the actual value of the stock. | The aim is to determine from where to enter & exit the market. |
| Data used for Analysis | Financial statements, economic reports, news events, industry statistics, and management practices, are considered for Analysis. | Charts, Stock Price are considered for Analysis. |
| Mainly used & focused for | Past & Present Data both | Present Data Only |
| Procedure | Analyzing industry trends, economic outlook, competitor performance, and financial data to understand the current scenario. | Analyzing market psychology and price movements to gain insights. |
| Indicators | Indicators such as expenses, revenues, assets, liabilities, debt-equity ratio, and return on equity ratio are used for analysis. | Indicators such as price data, RSI, MACD, simple moving averages, etc are used to analyze the market. |
Steps on How to do Fundamental Analysis?
- Understanding the Company: Prioritize gaining a thorough understanding of the company you intend to invest in. Explore their website to learn about management, products, and overall performance.
- Study Financial Reports: Analyze the company’s financials, including balance sheets, profit-loss statements, cash flow statements, and key metrics like CAGR, sales growth, and net profit. Look for consistent positive performance.
- Assess Debt Levels: Consider the company’s debt situation. Avoid those with high debt, and focus on companies with a debt-to-equity ratio of less than 1.
- Analyze Competitors: Compare the company with its competitors to ensure it stands out in terms of performance and future prospects. Look for a company with better growth potential and upcoming projects.
- Evaluate Future Prospects: Fundamental analysis is most effective for long-term investments. Choose companies with products or services that will remain relevant and in demand for the foreseeable future.
- Regularly Review: Stay updated on news and financial performance of the invested company. Continuously monitor all aspects and take necessary action if any issues arise.
By following these steps and actively reviewing your investments, you can actively make informed decisions and actively optimize your investment portfolio.
Key Take Aways.
Fundamental analysis is essential for investors to evaluate stock value and make informed decisions. By understanding the company, studying financial reports, analyzing competitors, and assessing future prospects, investors can identify strong investment opportunities. Regularly reviewing investments ensures ongoing success in the market.
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