What is Fundamental Analysis?
Fundamental analysis is a method of assessing the intrinsic value of a stock. It combines financial statements, external influences, events, and industry trends. It is important to note that the intrinsic value or a fair value of a stock does not change overnight. Such analysis helps you identify key attributes of the company and analyze its actual worth, taking into account macro and microeconomic factors.
Fundamental analysis uses three sets of data:
- historical data to check how things were in the past
- publicly known information about the company, including announcements made by the management and what others say about the company
- information that is not known publicly but is useful, i.e., how the leadership handles crises, situations, etc.
For a stock, fundamental analysis typically includes reviewing many elements related to stock prices, including:
- Performance of the overall industry the company participates in
- Domestic political environment
- Relevant trade agreements and external politics
- The company’s financial statements
- The company’s press releases
- News releases related to the company and its business
- Competitor analysis
If a company’s fundamental indicators suggest a negative impact, it will likely hurt its share price. On the other hand, if the data is positive, for instance, a favorable earnings report, it can boost the company’s share price.
What are the Different Types of Fundamental Analysis?
There are two main types of fundamental analysis –
- Qualitative: a study that involves brand value, management decisions, the financial performance of the company over a given period, and other similar factors.
- Quantitative: an analysis that is purely number-based and considers the company’s financial statements and concludes the share price from the observations.
Though the approaches are different, they are equally crucial for a comprehensive analysis of a company’s share price.
There are also two processes of fundamental analysis. One is top-down, and the other is a bottom-up approach.
The top-down approach looks into the macroeconomic factors first and then digs into the specific company. On the other hand, the bottom-up approach analyses the company first and then checks the effect of macroeconomic factors on the company’s performance.
What are the Basics of Fundamental Analysis?
Before conducting fundamental analysis of a stock, you need to consider a few basic factors. These factors are –
- Company’s structure and revenue
- Company’s profits over the years
- Revenue growth over the years
- Company’s debt
- Corporate governance
- Rate of turnover
Analysts look at these six factors while conducting a fundamental analysis of any security and determine its intrinsic value.
How to Do Fundamental Analysis of a Stock?
Here are some necessary steps to start a fundamental analysis of a company
- Understand the company, its operations, business model, etc.
- Use the financial ratios for initial screening.
- Closely study the financial reports of the company.
- Find the company’s competitors/rivals and study them.
- Check the company’s debt and compare it with rivals.
- Analyze the company’s prospects.
Importance and Benefits
Fundamental analysis of a company helps you get to its stock’s fair price, which may not always be trading at its fair value. Often it is overpriced or underrated.
Fundamental analysis helps in predicting the long-term trends in the market. It is generally used for long-term investments as it enables you to understand the price that the stock should reach. It also allows you to find good companies for investment, such as those with strong growth potential.
Additionally, the analysis helps with one of the most critical but intangible factors – business acumen, which is highly beneficial in investment analysis as it can tell you about the future of the business.
Fundamental Analysis (FA) vs. Technical Analysis (TA)
Many investors get confused between two terms or use them interchangeably – technical analysis and fundamental analysis.
Fundamental analysis of a company seeks to make a studied guess on a company’s cash flows based on how the economy, industry, and the company will perform. With this, the investor gets an idea of what the company/stock is worth.
On the other hand, technical analysis looks at internal market data such as price and trade volume. The focus of technical analysis is on identifying patterns and trends that will repeat so t
FAQs
Fundamental analysis involves assessing the intrinsic value of an asset by analysing both quantitative and qualitative factors. For example, an investor may examine a company's financial statements, management quality, competitive position, and industry trends to determine whether its stock is a good investment.
What is fundamental analysis and its types? ›
Fundamental analysis is a study of certain factors, such as financial statements, external factors, news, events and trends in the industry to determine the true value of a stock. Usually, it takes some time for the true stock value to change, depending on these factors.
How to do fundamental analysis step by step? ›
How to start a fundamental analysis ?
- Understand the company first.
- Use the financial ratios for initial screening.
- Closely study the financial reports of the company.
- Find the company's competitors/rivals and study them.
- Check the company's debt and compare with rivals.
- Analyse the company's future prospects.
Solid fundamental analysis can enable you to identify companies whose share price undervalues (or overvalues) their real worth. Investment in companies like this is known as value investing, and it's an approach that has been championed by many of the world's leading investors, such as Warren Buffett.
What are the different approaches for fundamental analysis? ›
There are also two processes of fundamental analysis. One is top-down, and the other is a bottom-up approach. The top-down approach looks into the macroeconomic factors first and then digs into the specific company.
What are the three types of fundamental analysis? ›
There are two types of fundamental analysis – Qualitative and Quantitative. Qualitative is inclined towards goodwill, market conditions, brand value, and company performance. In contrast, the quantitative analysis is statistically driven. Fundamental analysis is often compared with technical analysis.
What are the three main types of analysis? ›
There are three types of analytics that businesses use to drive their decision making; descriptive analytics, which tell us what has already happened; predictive analytics, which show us what could happen, and finally, prescriptive analytics, which inform us what should happen in the future.
What is fundamental analysis in simple words? ›
Fundamental analysis is a method of evaluating the intrinsic value of an asset and analysing the factors that could influence its price in the future. This form of analysis is based on external events and influences, as well as financial statements and industry trends.
What is the best way to define fundamental analysis? ›
Fundamental analysis (FA) is a method used to identify a stock's intrinsic or fair market value by examining a range of economic factors and financial metrics. FA let's investors determine if a stock's intrinsic value is lower or higher than its current market price.
What are the two types of fundamental analysis? ›
What are the different types of fundamental analysis? Quantitative and qualitative fundamental analysis are the two most prevalent forms of fundamental analysis that you can use to determine the intrinsic value of a stock to identify whether it is undervalued or overvalued in the market.
Fundamental analysis is a valuation tool used by stock analysts to determine whether a stock is over- or undervalued by the market. It considers the economic, market, industry, and sector conditions a company operates in and its financial performance.
What is fundamental analysis and its advantages and disadvantages? ›
Fundamental analysis is good for long-term investments based on long-term trends, very long-term. The ability to identify and predict long-term economic, demographic, technological or consumer trends can benefit patient investors who pick the right industry groups or companies.
What are the pros and cons of fundamental analysis? ›
Advantages and disadvantages
- Advantages: Objective: the quantitative part of fundamental analysis helps eliminate biases in making decisions on investments. ...
- Disadvantages: Time-consuming: because fundamental analysis tries to capture both macro and micro factors, it can take a long to prepare.
Price-to-earnings (P/E) ratio
P/E is one of the essential tools of fundamental stock analysis. It reflects the company's payouts as compared to its stock price.
Is fundamental analysis a strategy? ›
Fundamental analysis is an in-depth approach to assessing currency price trends. It mostly applies to long-term investing, so many short-term trading strategies and trading objectives can't rely on this method of analysis.
How to become a fundamental analyst? ›
To become a fundamental analyst, one does not require any special skill. Common sense, basic mathematics, and a bit of business sense are all that is required. A core-satellite approach to capital allocation is a prudent market strategy.
What is the fundamental analysis? ›
Fundamental analysis is a method of evaluating the intrinsic value of an asset and analyzing the factors that could influence its price in the future. This form of analysis is based on external events and influences, as well as financial statements and industry trends.
What is fundamental analysis with example? ›
Fundamental analysis is a method of determining a stock's real or "fair market" value. Fundamental analysts search for stocks currently trading at prices higher or lower than their real value. If the fair market value is higher than the market price, the stock is deemed undervalued, and a buy recommendation is given.
