Fundamental analysis of stocks is a broad concept. If someone is trading or investing in the stock market, evaluation of fundamentals of the company is a must. Furthermore, to make money in the market it is compulsory for every investor to consider the fundamentals of a company. If anyone ignores this fact, they will eventually land up making losses in the market.
Importance of Undertaking Fundamental Analysis of Stocks
Fundamental Analysis of stock forms an important part of stock market investing strategy. The big brokerage houses and long-term investors take their position in any stock based on such analysis. The investors or traders in most cases want to enter during bull run in the stock. This can be found out either by looking at the fundamentals of the company or the technical charts of the companies on the stock exchange.
In this article, you shall understand the concept of fundamental analysis of stocks.
First of all, let us understand the definition of fundamental analysis.
Definition of Fundamental Analysis
Fundamental analysis is finding the right valuation of a stock based on the financial and economic analysis of the company. With correct fundamental analysis of stocks,one can predict the price movement of the stocks.
Next, we shall look at the components that form part of fundamental analysis.
What Does Fundamental Analysis of Stocks Include?
The fundamental analysis of stocks includes the following components:
- Studying the financial reports of the company. The reports include balance sheet, profit and loss account, different ratios and other financial information of the company.
- The future outlook of the company. Like for example, the expected growth in demand for its products.
- Analyzing the effect of competitors on company’s business. Also, check whether any new entrant is powerful enough to impact the growth of the company.
- The changes in the economic condition of the industry. Also, understand how the economic changes are expected to affect the growth scenario of the company.
- Studying the government policies in relation to the different factors that affect the company. Similarly, check the past stability of the government and its policies in relation to the sector in which company is functioning.
- Understanding the debt structure. Analyse the debt surrounding the company. Check if the company is capable enough to reduce the debts in future.
To sum up, if the analysis of the above points is done correctly, it can prove to be extremely beneficial for an investor. High returns can be made by correctly evaluating the valuations of the company and investing accordingly. To conclude, an investor must always consider the fundamentals of the company before investing his money into the company.
Let us have a look at the general Fundamental Analysis Strategy to be followed while doing fundamental analysis of stocks.
General Strategy While Doing Fundamental Analysis of Stock
While conducting the fundamental analysis, the investor needs to look at the real or intrinsic value of the stock. If the real value of the stock is more than the price prevailing in the stock market,purchasing the stock is recommended. This is because the price of the stock has the tendency to move towards or above its real value. Therefore, trader must purchase the stock whose real value is less than the current market price on the stock exchange.
Fundamental analysis example, if the real value of the GMR Infra is Rs. 19. The current price prevailing in the market is Rs. 16. In the given scenario, the current market price is lower than the price of the stock. Therefore,purchase would be recommended in the GMR Infra stock.
What is the Goal of Fundamental Analysis of Stocks?
The ultimate goal of fundamental analysis of stocks is to find the right stock with right valuation. The stock should be such that can generate wealth in the future. Understanding the fundamental analysis of a company helps the investor to know where his money is going. If the investor wants to seek assurance for the amount of money that he is investing, fundamental analysis of a company is a must. This would not only help in making higher returnsbut also keep him relaxed when the price of the stock is not moving in his favour.
When a company is spotted at right valuation, the investor can multiply his capital to any extent. The sky is the limit for those companies where value unlocking has not taken place. Such companies stocks can rise and multiply themselves to unimaginable levels. Therefore, fundamental analysis of stocks is the soul of any investment.
⇒ Bottom Line :
“A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.” – says Benjamin Graham
The saying proves the importance of understanding fundamental analysis. We have looked at the basics of performing fundamental analysis. Fundamental analysis can prove to be extremely valuable, but it should be approached carefully. The starting point of a fundamental analysis should always be industry analysis. An investor or trader must understand the structure of the industry before investing his hard earned money. Financial statements i.e. profit and loss statement, balance sheet, cash flows, ratios, etc. offer good information for conducting fundamental analysis.
If you are a beginner in the stock market and are not well versed with reading and analyzing reams of data through annual reports, then you must take the help of experts or educate yourself.
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