Stock prices are subject to change almost every minute of the day, this is why investors need to be keen and observant of the various trends within the stock market. Every investor should spend time in some in-depth research and use their findings to forecast possible trends within the market.
Fundamental analysis looks at various factors that impact future stock prices. It mainly focuses on measuring the intrinsic value of a share, as a way of evaluating securities. A lot of data has to be analysed to determine the value of the security. Some of this data includes financial statements, business concepts, management competition etc.
The key factor about fundamental analysis is that it assesses stock values using real data.
Phases of Fundamental Analysis
There are 3 phases in fundamental analysis;
This is where a general assessment of the national economic state is made. The economic condition of a nation will affect the net value of any company and the prices of shares. For this kind of analysis, Economic indicators are used.
It is important to understand the various companies in the industry. Knowing their strengths and weaknesses, life cycles even the competition within the industry is essential in such data is what is evaluated.
Knowing the financial and none financial characteristic of the firm is essential to determine whether buying or selling or even withholding shares is the best move. Factors such as management, profitability, sales and product quality are analysed.
How To Determine Overvalued and Undervalued Stock
There are many factors that any investor will look at when investing. Among the factors, a major consideration will be placed on the price of the stocks and the company’s intrinsic value.
The process of determining the value of the stock is long and the process tedious because it requires looking into past and present data. Data analysed include balance sheets and other financial statements such as cash flow and income statements.
Comparing these details with stock prices using ratios will help determine whether the stock is overvalued or undervalued.
Qualitative and Quantitative Analysis
Fundamental analysis is divided into two;
- Quantitative – This deals with information whose value can be depicted in numbers or amounts.
- Qualitative – This deals with less tangible information. It relates to the nature of something rather than the quantity.
Considering Qualitative Fundamentals
There are four key qualitative fundamentals that investors will regard when considering a company to invest in:
It is essential to analyse exactly what a business does. It may sound rather simple or even obvious but details such as how the company makes money may change the business model altogether.
This evaluates things like the company’s track record in maintaining a competitive advantage. Does the brand name dominate the market? If it doesn’t, how closely does it compete with the other top names? A great competitive advantage will mean that shareholders will have the benefit of large returns for many years and hence a great choice in investment.
For any company to succeed, it needs proper management. This is why potential investors consider this factor during analysis.
Another factor that is analysed is how an organisation is run. Is it an efficient working place that upholds integrity and treats its workers fairly?
Considering Quantitative Fundamentals
The performance of a company is shown by the financial statements of the same. This information is useful for investors who are looking to invest. Three key financial statements are evaluated.
This represents the assets, shareholders’ equity and liabilities of the company. Assets are a representation of what the company owns while liabilities represent the debts the company needs to pay. Equity represents how much money was invested into the business by its owners.
This shows the performance of the business over some time. It shows the expenses, revenue and profits made over a given period.
Cash Flow Statements
It shows how income has come out of and into the business over a given period.
Fundamental Analysis is a great option for anyone who is opting for a long term investment rather than a short term trade. It can be a tedious analysis process but it can be quite rewarding in the long run.