WHAT IS FUNDAMENTAL ANALYSIS ?
Fundamental analysis is the cornerstone and the foundation
of solid investing . In fact, some would say that you aren't really investing
if you aren't performing fundamental analysis. Because the subject is so broad,
however, it's tough to know where to start. There are an endless number of
investment strategies that are very different from each other, yet almost all
use the fundamentals.
Fundamental analysis is the process of looking at a business at the
basic or fundamental financial level. This type of analysis examines key ratios
of a business to determine its financial health and gives you an idea of the
value of the stock.
It helps
you determine the underlying health of a company by examining the business’
core numbers: its income statements, its earnings releases, its balance sheet,
and other indicators of economic health. From these “fundamentals” investors
evaluate if a stock is under- or overvalued.
Fundamental analysis is the examination of the underlying forces
that affect the well being of the economy, industry groups, and companies. As
with most analysis, the goal is to derive a forecast and profit from future
price movements.
At the company level, fundamental analysis may involve examination
of financial data, management, business concept and competition.
At the industry level, there might be an examination of supply and
demand forces for the products offered. For the national economy, fundamental
analysis might focus on economic data to assess the present and future growth
of the economy.
To forecast future stock prices, fundamental analysis combines
economic, industry, and company analysis to derive a stock's current fair value
and forecast future value. If fair value is not equal to the current stock
price, fundamental analysts believe that the stock is either over or under
valued and the market price will ultimately gravitate towards fair value.
Fundamentalists do not heed the advice of the random walkers and
believe that markets are weak-form efficient. By believing that prices do not
accurately reflect all available information, fundamental analysts look to
capitalize on perceived price discrepancies.
Fundamental analysis begins with an individual stock, but it also
extends to that company’s larger context. It explores questions like these: Is
the company competitive within its industry? Is that industry growing or
shrinking, compared to other sectors?
Shares of companies with strong fundamentals will tend to go up over time, while fundamentally weak companies will see their stock prices fall. This makes fundamental analysis especially valuable to long-term investors.
Fundamental analysis is one school of investing research. It contrasts with another popular approach, technical analysis, which focuses not on business fundamentals but on stock-price action as reflected in charts. Technical analysts look for recognizable patterns in price charts that will help them estimate the stock’s future price movement.
BASICS FIRST STEP :
Shares of companies with strong fundamentals will tend to go up over time, while fundamentally weak companies will see their stock prices fall. This makes fundamental analysis especially valuable to long-term investors.
Fundamental analysis is one school of investing research. It contrasts with another popular approach, technical analysis, which focuses not on business fundamentals but on stock-price action as reflected in charts. Technical analysts look for recognizable patterns in price charts that will help them estimate the stock’s future price movement.
BASICS FIRST STEP :
When talking about stocks, fundamental analysis is a technique that
attempts to determine a security's value by focusing on underlying factors that
affect a company's actual business and its future prospects. On a broader
scope, you can perform fundamental analysis on industries or
the economy as
a whole. The term simply refers to the analysis of the economic well-being of a
financial entity as opposed to only its price movements.
Of
course, these are very involved questions, and there are literally hundreds of
others you might have about a company. It all really boils down to one
question: Is the company's stock a good investment? Think of fundamental
analysis as a toolbox to help you answer this question.
WHY TO CONDUCT FUNDAMENTAL ANALYSIS ?
Fundamental analysis serves to
answer questions, such as: Fundamental analysis helps you
determine if a company is a good or poor investment choice. Imagine you’re a
venture capitalist or a bank, who must decide if that company is worthy of a
loan or equity investment. How can you evaluate whether this particular company
deserves your investable capital?
Fundamental analysts consider the following in making their
decision to invest (or not):
- Is the company's sector better
one ?
- Is the company's product
worthable?
- Is the company's revenue
growing?
- Is the company making a profit
consistently? (While this is naturally the most important question for
investors, it’s important to consider the answer in a bigger context. A
single profitable quarter for a new company might be a fluke. In the same
regard, a drop in profitability for an established blue-chip company might
just be a temporary setback.)
- Is that profit growing or
declining over time?
- Is it actually making a profit?
- Is the company holding its own
relative to the competition? Is it a leader in its sector? Is that sector
growing or declining in importance to the overall economy?
- Can the company pay its bills
adequately? If you were to dismantle the company’s operations today, what
would be the intrinsic value of its assets versus the value of its debts?
- Is it in a strong-enough
position to beat out its competitors in the future?
- Is it able to repay its debts?
- Is the Management trying to
"cook the books"?
WHAT
INFORMATION DO YOU NEED TO PERFORM FUNDAMENTAL ANALYSIS?
You can think of fundamental analysis as “investing by the numbers,” since much of the work involves evaluating financial statements issued by the company. Here are a few key statements you should learn to read and understand.
All publicly traded companies in the United States
Publicly traded companies are also subject to audits by government agencies that oversee their given industry. Those audits may be either scheduled or random events. The results of a regulatory audit may also be published--interesting reading for a would-be investor.
The 10-Q and 10-K are good places to start your fundamental research, but you’ll likely want to dig deeper into the specifics. For that you’ll need to understand three interrelated types of statements: the balance sheet, the income statement and the cash flow statement.
Even though there is no one clear-cut method, a breakdown is
presented below in the order an investor might proceed. This method employs a
top-down approach that starts with the overall economy and then works down from
industry groups to specific companies.
As part of the analysis process, it is important to remember that
all information is relative. Industry groups are compared against other
industry groups and companies against other companies. Usually, companies are
compared with others in the same group. For example, a telecom operator
(Verizon) would be compared to another telecom operator (SBC Corp), not to an
oil company (ChevronTexaco).
ABOUT FUNDAMENTAL ANALYSIS :
Many investors use fundamental analysis alone or
in combination with other tools to evaluate stocks for investment purposes. The
goal is to determine the current worth and, more importantly, how the market
values the stock.
From the
Investment techniques a truth must be felt, that all the Techniques are not
applicable to all. Some may workout for some people. Some may not be suitable
for all. Each and everyone should analyze themselves and discover their own
favorable investment techniques which may best suits them.
The biggest part of fundamental analysis involves delving into the financial
statements. Also known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and
all the other financial aspects of a company. Fundamental analysts look at this
information to gain insight on a company's future performance. A good part of
this tutorial will be spent learning about the balance sheet, income statement, cash flow statement and
how they all fit together.
But there is more than just number crunching when it comes to analyzing a company. This is where qualitative analysis comes in - the breakdown of all the intangible, difficult-to-measure aspects of a company. Finally, we'll wrap up the tutorial with an intro on valuation and point you in the direction of additional tutorials you might be interested in.
The
Investment patterns so far seen are Long Term Investment patterns. For short
term traders there are Mechanical Trading, Momentum Trading, and Swing Trading,
alike several trading techniques are there. Those for Long term investors these
type of Trading Techniques are considered as much more. Able to value properly
is enough for a person ! If it is possible then you may be able to gain money !
How we can value a Stock? There are two types in valuing a stock. They are,
1)
Fundamental Analysis,
2)
Technical Analysis.
This
article focuses on the key tools of fundamental analysis and what they tell
you. Even if you don’t plan to do in-depth fundamental analysis yourself, it
will help you follow stocks more closely if you understand the key ratios and
terms. It's geared primarily at new investors who don't know a balance sheet from an income statement. While you may not be a
"stock-picker extraordinaire" by the end of this tutorial, you will
have a much more solid grasp of the language and concepts behind security
analysis and be able to use this to further your knowledge in other areas
without feeling totally lost.
EARNINGS
It’s all about earnings. When you come to the bottom line,
that’s what investors want to know. How much money is the company making and
how much is it going to make in the future.
Earnings are profits. It may be complicated to
calculate, but that’s what buying a company is about. Increasing earnings
generally leads to a higher stock price and, in some cases, a regular dividend.
When
earnings fall short, the market may hammer the stock. Every quarter, companies
report earnings. Analysts follow major companies closely and if they fall short
of projected earnings, sound the alarm.
While
earnings are important, by themselves they don’t tell you anything about how
the market values the stock. To begin building a picture of how the stock is
valued you need to use some fundamental analysis tools. These ratios are easy
to calculate, but you can find most of them already done on sites like cnn.money.com or MSN MoneyCentral.com.
We build a
home for our family. Even though swallowing lakhs or even Crores of money
required for construction, of the new house, entirely, with Quality products
like
1. Steel
Bars,
2. Jolly,
3. Cement,
4. Bricks,
5. Sand
etc….
the
basement of that specified building should be properly planned with
1.
Appropriate plan
2. Total
floor of the building,
3. Total
height of the building,
4. Total
length and breadth of the building
5. No: of
rooms involved,
6. Gross
weight of the building
7. No: of
Pillars to be involved etc…
considering
all these basical factors only and with the help of those materials from the
bottom to the Top portion of the building will be designed and built, lasting
for several years.
Similarly
while Appointing a person either Male / Female for a new job in a company the
following criteria’s may be selected namely,
1. His /
Her Qualification,
2. Work
experience,
3. Present
Age
4. Fluency
in Languages one or more,
5. Optional
skills,
6.
Communication skills,
7. Height,
8. Weight
9. Eye-
sight etc….
A stock
market may contain thousands of Organizations with various
1. Market
Capitalizations,
2.
Different Sectors,
3.
Production oriented,
4. Service
oriented,
5. Lasting
for years,
6. Newly
entered,
7. Running
in fair gain / profits
8. Moderate
gains
9. Losses
etc….
Generally
looking all the companies seems to be performing well. But in practice we can
realize that many companies are not functioning like that. Some sectors may be
functioning good, some moderate, and some worst, etc…If a stock being purchased
without analysis what may happen ? It may lead to a loss. Is there any way to
safeguard our investments by basically selecting the stocks ! Yes it is called
as Fundamental Analysis.
Fundamental
means -- Basic characteristics present (required
)
Analysis -- To
analyze the nature of stocks and so on,
Many newly
entering investors, after assuming that with the help of Technical Analysis,(
knowing by way of Newspapers, Journals) taken unknown risk and after a Huge
drawback, with lamenting totally leave the market. Afterwards they never enter
the stock market. Some may confuse themselves, either the Fundamental nor the
Technical which one may be the apt in selecting a stock. Like the basement of a
Building, Fundamental analysis must be strong, and Technical Analysis reflects
the future prospects and etc…… Without fundamental there is no Technical can be
understood by Long term investors. But for short term investors or for Traders,
Fundamental is not a must should be borne in mind.
