Fundamental Analysis of Stocks for Beginners

Fundamental Analysis of Stocks for Beginners

To find the most suitable & most profitable investment opportunities, analysing and researching stocks is very important. There are two basic ways you can analyse stocks -

1.  Fundamental Analysis

2.  Technical Analysis

Now the debate between fundamental and technical analysis is never ending as both have their own merits and demerits. Fundamental Analysis is mostly used for investments in the long run while technical analysis is used more for short term trading and market correction. Components of either analysis may contradict the results of the other but that doesn’t mean they are wrong, as a matter of fact both can be used to combine, analyse and execute investments over short, medium and long-term. As fundamental analysis has been one of the most gratifying and successful assessment methods throughout time, let’s take a closer look at it.

What is fundamental analysis?

Fundamental analysis is the study of a market instrument or security using quantitative, qualitative, financial and economic factors to determine its intrinsic value. It includes the study of a company’s financial statements like their balance sheet, income statement and cash flow statements which help us understand the company’s progress rate, performance and health. A number of micro and macro-economic factors come into play with an evaluation like this, which are -   

• Policy Changes
• Industry Conditions
• Financial Conditions
• Managements Expertise
• Economic Conditions
• Competitors

Objective of Fundamental Analysis

The objective of the fundamental analysis is to determine if a stock is undervalued or overvalued by evaluating and comparing the difference between its intrinsic value and current price.

Quantitative and Qualitative Fundamental Analysis

Fundamentals being a broad term covers everything related to the company like profit, loss, revenue, market share. It also includes quality of their staff and patents. To minimize the confusion fundamental factors are divided into two subsets:

While doing Fundamental Analysis the key factors to consider are the following:

How to Perform Fundamental Analysis for Stocks:

Understanding the Company (Qualitative Analysis)

Understanding the company you’re investing in provides you more in-depth information as to how the company is performing or if they are on the right track towards their goals. This should be helpful enough to let you decide whether you should buy more, hold or sell the stock.

Studying the Financial Reports of the Company (Quantitative Analysis)

After Qualitative analysis of the company comes the analysis of their numerical data such as balance sheet, profit-loss account, Operating expenditure, Cash Flow statements etc.
CAGR or Compounded annual growth rate is also another key metric for evaluation as it tells us if a company is healthy or not.

Debt Check

A security can never perform well if it has a huge debt of its own and it is one of the most important factors that can lower a company’s performance. Finding the Debt-to-Equity (Ideal - Less than 1) financial ratio hence becomes important

Competitor Analysis

Finding the company which is performing the best in their market compared to their competitors is a key task. Values compared in this step among competitors are Long-term goals, Upcoming projects, Future prospects etc.

Analysing Future Prospects

If you want to invest long term then fundamental analysis is the most efficient as it helps you to identify and invest in those companies which will be profitable 20-30 years along the line.

Rechecking the entire analysis from time to time

Always keep in touch with how your company has been performing in the market and keep reviewing their financial growth. Always be updated and don’t forget the company you invested in.

Pros and Cons of Fundamental Analysis:

Customer Notice:

Nextgen Global Services Pty Ltd trading as Kapitales Research (ABN 89 652 632 561) is a Corporate Authorised Representative (CAR No. 1293674) of Maven Capital Pty Ltd (AFSL No. 418504). The information contained in this article is general information only. Any advice is general advice only. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of this product for your circumstances. Please be aware that all trading activity is subject to both profit & loss and may not be suitable for you. The past performance of this product is not and should not be taken as an indication of future performance.

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