The investment process is important for all of us to understand in detail, and picking the right stocks and understanding their performance is an integral part of this process.
Like in my case, I’m sure you too must have been advised by your elders to start investing & savings as early as possible, isn’t it?
To me, it’s the best piece of advice ever.
Here’s what legendary investor, Warren Buffett had to say on early investment process –
But one thing which nobody suggests is that not to invest on borrowed ideas.
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|Why conduct fundamental analysis?|
People have a tendency to invest by listening to others including the “so-called” experts on television, or friends and relatives.
But it may happen that the stock which they are suggesting may be suitable for him/her but not for others since time plays a key role in investing.
Say a stock which looks a very poor investment in the short run could be a very good investment for the long term.
I believe the right path would be either to give your money in expert’s hand or rather start with your own research.
The path to start with your research is through fundamental analysis. So let’s understand what fundamental analysis is and why do we need to conduct an analysis?
Fundamental analysis is a process which attempts to determine the value of a security by focusing on the underlying factors which affect company’s business and its future prospects.
In short, it analyses the economic well-being of a business entity as opposed to tracking its price movement.
Why conduct fundamental analysis?
The reason behind conducting fundamental analysis is to determine the mispricing between the current share price and the price it ought to be.
It is built on the idea that the stock market has a tendency to go wrong from time to time.
So the role of the fundamental analyst is to find the mispriced or underpriced stocks and to wait until the market adjusts the valuation of the company.
Fundamental analysis is the building block of investment process. Someone has rightly said that you aren’t really investing if you aren’t performing fundamental analysis.
Also Read: Why Fundamental Analysis is Important
The fundamental information which we analyze includes company’s annual reports financial statements and other non-financial information which includes an industry overview, growth estimates for company’s product, company’s comparative advantage, changes in government policy etc.
George Soros said-
Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values
The full energy of fundamentalist is devoted to finding a stock’s “true value” or “intrinsic value”. Basically, he would purchase the stock if the current market price is below its intrinsic value since he believes that the price will rise someday and move towards its intrinsic value.
On the other hand, if the current market price is above the intrinsic value, he would love to sell the stock on the faith that the price will fall and come towards its intrinsic value.
Once you have made a proper analysis based on the above-mentioned factors, you will be in a better position to identify whether the stock is overvalued or undervalued at the current market price. Moreover, fundamental analysis can also be made for the sector and the economy as a whole.
I hope that I am able to give you a brief idea of fundamental analysis.
In the upcoming blogs, I will discuss more on the concepts of fundamental analysis.
Keep learning and spreading financial literacy!!