Skip to main content

Fundamental Analysis of Stocks




Q1. What is fundamental analysis?

Answer: Fundamental analysis is the detail evaluation and analysis of the entity’s financial statement. It provides the information regarding the entity’s operation. With the help of financial analysis tools, one can easily forecast the company’s future. It gives the bird’s eye view of the performance and growth of an organization.


Q2. What is a fundamental analysis of the stock?

Answer: Apart from the technical analysis as we have discussed earlier, fundamental analysis is the detailed study of both macroeconomic and microeconomic factors that affect the company’s share price in the secondary market (i.e. stock exchanges). 

In order to determine the fair value of the shares, we have to calculate the intrinsic value of the shares. Various fundamental analytical tools help an investor to determine the intrinsic value of the stocks.



Q3. What are the major components of the fundamental analysis?

Answer: Fundamental analysis has three main components. They are company analysis, industry analysis, and the economic analysis. Under company analysis, we look and analyze the company financials such as profits ratio, growth, Net worth, Stability, performance indicators, cash flows, etc.

Similarly, under industry analysis, we compare the company’s data with the corresponding data in the industry to which the company belongs. This helps an investor to analyze the company’s progress and performance among its other competitors who belong to the same industry. Its also reflects the organization performance whether it is outperforming or whether it is under performing.


Apart from this, the third main component is the economic analysis. Under economic analysis, we go through the detailed study of various economic factors like GDP, Per capita income, Interest rate, monetary policies, employment rate, productions, foreign currency reserves, etc.



Q4. Who uses the fundamental analysis tools?

Answer: Fundamental analysis is mostly used by the long-term investor. The long-term investor doesn't make their buy or sell decisions based on the short-term fluctuation like that of Intra-day traders. Whereas Intra-day traders use the technical analysis for their trade decisions, Inter-day traders use fundamental analysis for their decisions regarding the long-term investments. ( To know more about Inter day and Intra day traders, click here)

In short, they are the value investors. They are generally the one who is not influenced by the short-term market sentiments. They analyze the company’s value based on the detailed analysis of the company financials and finally invest in that value through stocks.



Q5. What are the various fundamental analysis tools?

Answer:  
Fundamental analysis tools mainly focus on earnings, growth, and value in the markets.       Some of the major fundamental analysis tools are:
  • P/E (Price Earning) ratios,
  • EPS (Earning Per Share)
  • Dividend yield ratios
  • BVPS (Book Value Per Share)
  • ROE (Return On Equity)
  • ROI (Return On Investment)
  • Dividend Pay Out Ratio
  • IVPS (Intrinsic Value Per Share)



Q6. Long-Term Investment Strategy based on Fundamental analysis.

Answer: The main purpose of the fundamental analysis is to determine the stronger and the weaker companies or industries. With the help of the fundamental analysis, an investor can calculate the intrinsic value of the shares. The intrinsic value of the shares means the fair value of the stocks.

If the intrinsic value of the shares is higher than the market price of the shares then the investors go long (i.e. they buys and holds the stocks for long-term return). It is not a better idea to buy the stocks for long-term when its market value is more than its intrinsic value.
We’ll discuss the various fundamental analysis tools in detail in our next article. Till then
“Stay Hungry Stay Foolish” – Steve Jobs

Also see Technical analysis of the stock, Beginner's guide for trading in equities, Company analysis for investment decisions.


Labels:
Location: United States

Comments

Post a Comment

Popular posts from this blog

Ratio Analysis: A Brief Introduction

What is Ratio Analysis? An analysis of the mathematical relationship between two individual figures or group of figures logically linked with each other and picked from financial statements of the concern is known as ratio analysis. The objective for financial ratios is that all stakeholders (owners, investors, lenders, employees etc.) can draw conclusions about the Performance (past, present, and future) Strengths & weaknesses of a firm And can take decisions in relation to the firm.  Ratio Analysis The ratio analysis basically puts light on the fact that a single figure data by itself may not reflect any meaningful information but when expressed as a comparative to some other figure, it may definitely provide some significant information. Ratio analysis is not just comparing different numbers from the balance sheet, income statement, and cash flow statement. It is comparing the number of previous years, other companies, the industry, or even the e...
Post a Comment
Read more

Interest Rate, Economy And Capital Market

  Interest rates are an integral part of an economy and capital markets. They are important in both the lending and borrowing process, affecting how much capital moves through an economy and how savers and borrowers interact. The level of interest rates will affect decisions made by individuals, families, businesses, and governments. By understanding how the interest rate affects each group, it can provide insight into macroeconomic trends, enabling economists and investors to forecast the direction of the market. When the interest rate is low, borrowing, investment and consumption tend to increase. People are more willing to borrow money to buy cars, houses, and businesses are more willing to borrow money to expand and invest in projects. Consumer spending, likewise, increases because it's cheaper to purchase goods when borrowing is easier. This drives economic growth, increases employment, and raises wages as more people become employed. In addition, savers, who can't get muc...
Post a Comment
Read more

Things You Need To Know Before Getting A Mortgage

Buying a house is one of the biggest financial decisions a person can make. It’s hard to understand where you should begin or what the most important things are to consider when it comes to taking out a mortgage Whether you want to purchase your first home, an investment home, or a vacation home, it’s important to know what you need to know before getting a mortgage. First and foremost, know your credit score and be prepared to explain your credit history. Your credit score is one of the most important factors when it comes to a lender making a decision whether to grant you a mortgage. While it can take time to improve your credit score, it’s important to address any red flags that lenders may see during their review. Pay close attention to your score and start improving it as soon as possible if you find any discrepancies. Next, know your overall financial situation and determine how much you can afford. You’ll need a financial buffer and it’s advisable to have access to funds for mai...
Post a Comment
Read more