It’s a good idea to be guided by more than just instincts when making investment decisions. Fundamental analysis comes in handy during this kind of situations. If used right, it can effectively help investors determine whether a company is a good investment choice.
The absence of a background in finance, however, shouldn’t stop you from learning how to apply fundamental analysis and becoming your own stock portfolio analyst. Here’s the things you need to know about fundamental analysis and how you can use it for investing:
What Is Fundamental Analysis?
PSE fundamental analysis examines the core factors that affect, if not determine, the well-being of companies, industry groups, and even the economy. Like any other type of analysis, it is used to obtain financial forecasts and profit from predicted price movements.
Levels of Application
For companies, fundamental analysis is used to examine data based on the competition, business concepts, management, and primarily, financial data. Industry groups use fundamental analysis to examine the forces that affect the supply and demand for the products that their respective industry offers. For national economies, on the other hand, fundamental analysis examines economic data to evaluate the growth of an economy, both present and future.
When all three are combined fundamental analysis is able to derive a stock’s current fair value and consequently forecast future stock prices.
Factors Affecting Fundamental Analysis
Fundamental factors are grouped into two categories: quantitative and qualitative. Quantitative factors are expressed in numerical terms and thus can be measured. In the stock investing context, they are measurable characteristics that define a company’s value. In fact, the biggest source of quantitative data is a company’s financial statements that include information about profit, assets, revenue, and more – all of which can be measured and evaluated.
Qualitative data, on the other hand, is based on the quality, reputation, or character of a brand, industry, or economy. These are less tangible factors such as proprietary technology, patents, brand recognition, and even key executives and board members.
Understanding Fundamental Analysis
Typically, analysts employ a method or order when studying about the value of a specific company, industry, or economy. This method is a top-down approach that helps analysts arrive at a fair market value for a stock. It starts with the overall state of an economy, down to the strength of a particular industry before focusing on individual company performance.
To evaluate the value of a stock or any other type of security, analysts use public data. For example, an investor looks at economic factors such as the overall state of an economy and interest rates to determine a bond’s value. After which, the investor can study various bond issuer information such as potential changes in its credit rating. This is how you perform fundamental analysis.
For stocks, analysts use profit margins, earnings, revenues, return on equity, future growth, and other data to determine the underlying value of a company and its potential for growth.
What to Remember
Although a valuable asset to stock investing, fundamental analysis should be approached with sensibility. It is important to be familiar with the analyst behind a financial report. It goes without saying that before you use any public information to evaluate a company, industry, or economy, make sure that your sources are reliable and reputable.