Learn from the experts in the field with our collection of webinars on Fundamental Analysis.
By Chanchal Beriwala CFA
Navigating Market Trends and Asset Allocation Strategies
- May 13, 2023
By Nikhil Gangil
Mastering Value and Cyclical Investing for Multibagger Returns
- Jan 11, 2023
Take your Fundamental Analysis skills to the next level with our handpicked courses.
What is Fundamental Analysis of Stocks and how to do it?
Fundamental analysis is a technique that helps you assess the financial health of the company. By financial health, we mean the current performance along with the future growth prospects of the company. Therefore, helping an investor to evaluate the 360-degree outlook of any company or stock. There are two methods to evaluate or pick a stock, Fundamental Analysis & Technical Analysis. While Technical Analysis is more about analyzing the charts & trends, fundamental analysis is about reading between the lines through the financial statements of the company. Before entering the stock market or any field, it is important to learn the techniques under the above two methods. For instance, you can opt for fundamental analysis courses to enhance your knowledge of this method.
Why should we choose Fundamental Analysis?
Choosing any method in the stock market is completely a matter of choice. Usually, it is said that Technical
Analysis is for the short-term and Fundamental Analysis is for the long-term. However, this notion may differ from
person to person.
If you choose this method, then you can determine an asset's intrinsic value and analyze the factors that may influence its price in the future. This means it helps you to predict future growth prospects of the stock in the long run.
This will help you to understand whether to stay invested in that particular stock or not.
A fundamental analyst looks at everything that can influence the value of a stock, from macroeconomic factors like the state of the economy and industry circumstances to microeconomic factors like the company's management performance.
Usually, Fundamental Analysis of stocks is done from a macro level first, where factors that dictate and affect the state of the economy are being analyzed.
The analysts then proceed to the micro-level, where they focus on the growth of a certain industry and examine company-specific aspects such as management composition, structural changes in management, and so on.
Finally, the analyst determines whether the security is currently overvalued or undervalued in relation to its existing value, and makes trade decisions accordingly.
Fundamental analysis uses three sets of data:
- Historical data to see how things were in the past
- Publicly available information about the company, such as management announcements and what others say about it
- Information that is not widely known but is useful, such as how the leadership handles crises, situations, and so on.
The Forward Contracts are not traded in Stock Exchanges and are typical customized contracts. This is formed between parties on buy and sell of a particular asset at a predetermined price in future. Fundamental research of stock often entails looking at a number of factors that influence stock prices, such as:
- The company's overall industry performance
- Domestic political environment
- Important trade agreements and foreign policy
- The financial accounts of the company
- Press announcements sent by the company
- Press releases on the company and its operations
- Analyze your competitors
If a company's fundamental signs point to a negative impact, its stock price will most certainly suffer. On the other side, if the data is positive, such as a positive earnings report, the stock price of the company may rise.
Importance of Fundamental Analysis?
Fundamental analysis helps in the prediction of long-term market movements. It's typically utilized for
long-term investments because it helps you figure out what price the stock should hit. It also enables you to
discover good investment opportunities, such as those with high growth potential. Fundamental analysis is most
commonly used to evaluate stock prices, but it may also be applied to other asset types such as bonds and
Fundamental Analysis believes that any macroeconomic factors such as the state of the economy, inflation, or any fiscal or monetary policy implemented by the government may have an impact on the market's securities.
Fundamental analysis uses publicly available data to determine the value of a stock or other sort of security. An investor, for example, can undertake fundamental research on a bond's value by looking at economic factors like interest rates and the overall status of the economy, then reviewing information about the bond issuer, such as probable changes in its credit rating.
Benefits of Fundamental Analysis
- Fundamental analysis helps to identify the company that outperforms its competitors.
- It is very much effective for investing purposes as it determines the actual value of the stock.
- With the help of this analysis, future growth prospects for the particular sector or industry are determined.
Basics Elements of Fundamental Analysis?
A few basic elements must be considered before conducting fundamental analysis of a stock. These elements are:
- Company’s structure and revenue
- Company’s profits over the years
- Revenue growth over the years
- Company’s debt
- Corporate governance
- Rate of turnover
Analysts look at these six factors while conducting fundamental analysis of any security and determine its intrinsic value.
Steps Involved in Carrying Out Fundamental Analysis
The first step an investor needs to do is to decide upon the industry in which an investor wants to invest by analyzing the economic factors that will positively impact the industry's growth and then analyzing the company in that particular industry they can invest in.
This approach of identifying the company for investment is known as the Top-down approach. Investors can even choose a bottom-down approach by first analyzing the company in which they want to invest in, then analyzing the industry and the economic factors.
The second step involves analyzing the sector taking into account whether the sector is favorable or not.
The third step involves analyzing the financial statement and financial ratios of the company. Financial ratios include (Earning per share, sales growth, dividend- taking into account of last 5 years, other ratios like price-earnings ratio, debt to equity ratio, etc.)