Fundamental Analysis for Investing in Stocks

There are many investment styles- technical, fundamental, growth investing, value investing, speculating, etc. Fundamental Analysis, as the term suggests, is about the fundamentals of a stock. It focuses on understanding the prospects of the business underlying the stock by analyzing the financials of a company, qualitative factors like management quality and economic factors affecting an economy and industry. The aim of Fundamental Analysis is to uncover the intrinsic value of a stock.

Technical analysis is another type of investment analysis that focuses on the momentum of a stock and doesn’t bother too much with the underlying business. Price history of a stock, current momentum, liquidity in the market, investor sentiments, etc are the key factors in technical analysis. A long-term investor should never bother with technical analysis, as short-term trends do not matter in the long run.

Many investors depend on a combination of technical analysis and fundamental analysis for making decisions regarding stock investment. If you are a long-term investor, and are willing to put in some effort in order to make a decent amount of profit from investing in stocks, you will do a world of good to yourself by doing some fundamental analysis before you invest any money.

To be a good fundamental analyst, one needs to master the art of interpreting financial statements. Fundamental analysis starts with analysis of financial statements and various ratios. It takes into account operating cash flows, earning per share, Price to earning ratio, capital structure, earning estimates, current ratio, debt to equity ratio, etc. A fundamental analyst tries to derive the value of a business based on various valuation models. Some of these models are discounted cash flow model and dividend discount model. Apart from analyzing the past financial data of a business, most models depend on assumptions regarding the future growth and risk associated with the business. This factor makes even fundamental analysis very subjective, leading to divergent views about the value of stock in the eyes of different analysts. For knowing more on these stock evaluation models, you can google the terms highlighted above.

Value investing is not very different from fundamental analysis. If you go through the lessons on how to select stocks, you would have covered a major part of fundamental analysis.

It is very difficult to cover the topic of fundamental analysis in one post. Suffice to say that fundamental analysis involves understanding the businesses behind stocks and presents an investor with opportunities to invest in undervalued stocks. For knowing more on fundamental analysis, you can go through other posts on this blog.