What is Fundamental Analysis?
Fundamental analysis is a method of estimating the intrinsic value of a stock.It combines monetary statements, outside influences, events, and enterprise trends. It is important to note that the intrinsic value or fair value of a stock does not change overnight. This kind of analysis helps you identify the key characteristics of the company and analyze its real value taking into account macro and micro economic factors.
- Historical data to check how things were in the past
- Publicly known information about the company, including announcements made by management and what others say about the company
- Information that is not publicly known but is useful, i.e., how leadership handles crises, situations, etc.
For a stock, fundamental analysis typically involves a review of several elements related to stock prices, including:
- Performance of the overall industry in which the company participates
- Home political environmentRelevant trade
- Agreements and external politics
- Company Financial Statements
- Company Press Release
- News releases associated with the organization and its business
- Competitor analysis
What are the Different Types of Fundamental
- Qualitative: A study that includes brand values, management decisions, a company’s financial performance over a certain period, and other similar factors.
- Quantitative: An analysis that is entirely number-based and considers the company’s financial statements and draws stock price conclusions from the observations.
Although the approaches are different, they are equally important for a comprehensive analysis of a company’s share price.
There are also two processes of fundamental analysis. One is top down and the other is bottom up approach.
The top-down approach first looks at macroeconomic factors and then examines the specific company. On the other hand, the bottom-up approach first analyzes the company and then examines the impact of macroeconomic factors on the company’s performance.
Basics of Fundamental Analysis
Before performing fundamental analysis of a stock, you need to consider some basic factors. These factors are –
- Company structure and revenues
- Company’s profits over the years
- Revenue growth over the years
- company debt
- corporate governance
- turnover rate
Analysts look at these six factors when performing fundamental analysis of any security and determining its intrinsic value.
How to do fundamental analysis of a stock?
Here are some essential steps to begin
- fundamental analysis of a company
- Understand the company, its operations, enterprise model, etc.
- Use financial ratios for initial investigation.
- Study the company’s financial reports closely.
- Find and study the company’s competitors/rivals.
- Check the company’s debt and compare it with competitors.Analyze the company’s prospects.
Benefits
Fundamental analysis of a company helps you arrive at the fair value of its stock, which may not always be trading at its fair value. Often its price is higher or lower.
Fundamental analysis helps predict long-term trends in the market. It is generally used for long-term investing as it enables you to understand what price a stock should reach. It also allows you to find good companies to invest in, such as companies with strong growth potential.
Additionally, the analysis helps in one of the most important but intangible factors – business acumen, which Is noticeably useful in funding evaluation as it may let you know approximately the destiny of the business.
