Before delving into any kind of investing or as people more commonly like to indulge in “speculation”, the basics of both Fundamental and Technical Analysis of stocks, must be engrained in your mind. In this article, we will not only be covering what Fundamental Analysis is, but will also make sure that every single one of our readers understands the implications and importance of it, in very simple, non “Financial Jargon” terms.
What is Fundamental Analysis?
Fundamental analysis studies anything that can affect the stocks value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management. Basically, although each investor is exposed to the same financials and public information about the company, the effectiveness and the very deduction of what each investor thinks about the current price of the stock, will vary significantly.
How to Use Fundamental Analysis to pick stocks?
For stocks, fundamental analysis uses revenues, earnings, future growth, profit margins, and other data to determine a company's underlying value and potential for future growth. All of this data is available in a company's financial statements all over the internet nowadays. There are many ratios regarding this kind of analysis like the debt/equity ratio, the Book/Price ratio but the single most important metric used by every single person who tried their hand at the analysis of stocks, is the Price/Earnings or The P/E ratio. This ratio is the ratio of the current price of a company’s share in relation to its earnings per share, which is how much revenue the company generates, compared to its shareholder equity. This metric, in the most simple terms possible, can tell you how expensive or inexpensive a stock is, in relation to how much money the business under that stock, Is really making. Again, this ratio can be interpreted in various ways, but it can be an effective screener in your stock picking journey.
Personally, we like to use the OPM or the Operating profit Margin, growth in net profit, trend in dividend yield and sales growth as key financials to judge a company’s core business. Things like the competence of the management of the company and the future prospects of its business, can also heavily impact an investors sentiment on a stock. However, such things are based on the interpretation of the investor and is very subjective. This is where opinions on a particular stock can heavily differ.
Key takeaways
This form of analysis is the single most oldest and effective way to generate good returns from the markets. Any aspiring investors journey towards that successful portfolio, must start from the very basics of Fundamental Analysis. Something to be noted is that Fundamental Analysis is only effective in the longer scheme of things and is the tool used by even the biggest hedge funds and investors, to knit together their long term portfolio. In the long run, the market will reflect the fundamentals.
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I agree that sales growth should be seen.But it is necessary to also look into the quality and source of the growth as new competitors are attracted to that particular field and tend to take the market share for themselves.Anyways this is a great initiative and I appreciate your work.