Basic Understanding of Fundamental Analysis
An analysis done in connection with trading and investing in Stock markets can be broadly classified into two types. One is FUNDAMENTAL ANALYSIS and the other one is TECHNICAL ANALYSIS. Analysts prefer them on the basis of their circumstances, preferences, stock objectives and purposes.
Let’s understand FUNDAMENTAL ANALYSIS in a simple language. It is a HOLISTIC ANALYSIS which is aimed at assessing stocks value (any security ) on an INTRINSIC BASIS for the purpose of decision making, especially for long term investment.
FUNDAMENTAL ANALYSIS gives more focus to analyse the below issues.
Macro Economic Factors
Strict study would be carried on important elements Like Gross Domestic Product, Inflation, Economic Growth And Development, Interest Rates, Stock Markets
DIRECTION, WORLD MARKETS INFLUENCE ON OUR MARKETS , in terms of how they affect the value of the stock that is being valued .In simple words , analysts try to find out the effects of the factors which will influence the growth and development of the company being valued
Other Factors And Company’s Own Factors
Financial statements would be strictly studied to get information about Past earnings, Market share, Quality of Management, Reserves, Contingent liabilities, Sales growth patterns etc., in order to forecast the future value of the business as a whole.
Objectives And Purpose
FUNDAMENTAL ANALYSIS would help the analysts to come out with stocks which can potentially perform well in the long run .Stocks which are artificially priced high because of demand and supply forces can be identified and properly dealt with depending on other factors involved in decision making .These analysts in such a case would recommend investors to buy whenever stock trends down to its actual intrinsic Value , since they strongly believe that stock comes down the maximum to the level of its intrinsic value or the actual value of its business, whenever bad news leads to down trend . With an understanding of actual value of business of a company , stock can be given a value for which it can be bought for the purpose of long term investment. Primary objective happens to be identification of stocks which can create wealth over time .
Points To Ponder
A good strategy calls for an analyst who gives appropriate levels of focus to both FUNDAMENTAL ANALYSIS as well as TECHNICAL ANALYSIS even while planning for long term investments.FUNDAMENTAL ANALYSIS is a must especially for long term investments since it’s really risky to invest in artificially blown up stock price s of the listed companies .Investors are to prefer good advisory firms for such valuations and invest accordingly.To simply sum up the entire discussion, analysts do a due diligence exercise and find out the real worth of the company and accordingly plan for the purchase price of a stock . It does not mean that this analysis is useful for purchase of a stock. It is useful even to decide if holding a stock would be better or not in terms of wealth creation. Stocks which are priced equal to or above our assessed value would be purchased and stocks which are priced higher than our assessed value will not be purchased or sold if they are held .