Fundamental Analysis

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The basic Fundamental Analysis meaning is a method that is used for measuring the intrinsic value of a stock or security. It mainly depends on the economic factors affecting the business and its financials.

This process is not only limited to the company’s financial structure but it goes beyond that.

It includes the general economic scenario, the industry’s growth, and fall, along with the company’s organizational structure, management, and financials.

So, it is a complete study of a business venture to analyze its actual worth and then to measure its share’s intrinsic value.

It takes into account both macroeconomic and microeconomics factor at the same time. The notion behind this is to analyze the real price against the prevailing price in the market.


The types of Fundamental Analysis

There are two different Fundamental Analysis Types and they are quantitative and qualitative.

Fundamental Analysis Stocks that involve brand value, the financial performance of the company, management’s decisions, and other similar factors can be termed as a qualitative approach.

The quantitative approach includes numbers. It analyses the numbers in the financial statements and draws a conclusion about the price of the shares from there.

Though both the approach is different both are equally important in a complete analysis of a company’s share price.

Apart from these two, there are two different processes of fundamental analysis. One is top-down and the other is a bottom-up approach.

While the top-down approach looks into the macroeconomic factors first and then digs into the specific company, the bottom-up approach analyses the company first and then check the effect of the macroeconomic factors on the company’s performance.

To start a Fundamental Analysis

There are few basic steps to start this analysis and the steps are :

  • For preparing the Fundamental Analysis Strategies, you first need to understand the company well.
  • The second step is to use financial ratios. The ratios are the primary source of information required for this analysis.
  • Third step is to study the financial and annual reports of the company.
  • The fourth step is also about reading the annual reports but of the rival companies’.
  • Next step is to compare the company’s debt structure with its peers and rivals.
  • Finally, you need to analyze the prospects of the company to find out its worth.

The Basics of Fundamental Analysis

For Fundamental Analysis Strategies, there are few Fundamental Analysis Basics which needs to be considered. These are primary factors which affect the analysis of the stock and they are :

  • Company’s revenue and its structure
  • Growth of the revenue over the years
  • Profit made by the company in the past years
  • Debt structure of the company
  • Rate of Turnover
  • Employee management and management’s approach towards its employees

These are six basic factors that are looked at while doing fundamental analysis of any security.

This is required to determine the intrinsic value of the stock and check whether it is rightly priced at the market or not.

The Role of Fundamental Analysis in Trading

The role of Fundamental Analysis in Trading is highly important. It is undoubtedly the best possible way to find out the real worth of any stock.

The role of Fundamental Analysis for Investment is basically to find out the intrinsic value of the stock based on the quantitative and qualitative sources of information.

This intrinsic value is required to compare with the current market price of the stock and take decision for investment.

So, if the market price is above the intrinsic value, the investor should sell or short the stock as the price in the long term is going to fall as the stock is overvalued and vice versa.


The Objectives of Fundamental Analysis

The objectives of Fundamental Analysis of Stock Market are :

  • To predict the future price of the share of the company
  • To do the valuation of the asset of the company
  • In order to project the performance of the business
  • To measure the credit risk
  • To evaluate the management’s decisions
  • In order to find the intrinsic value of the asset