How to do fundamental analysis on stocks?

You’re eager to begin investing, yet the stock market feels like uncharted territory. Seeking answers, you scour Google, exploring tips from peers and family. Then, you find this blog—a guide to unlocking the secrets of fundamental analysis of stock. Questions flood your mind: What is it? How does it benefit me? 

This blog holds the answers you seek. Keep reading to uncover the power of fundamental analysis in building your financial success. 

What is Fundamental Analysis?

Fundamental Analysis is the method of looking into the company’s financial performance (both in the present and past) to learn the value of the company’s true price. This method helps us analyse how the company is making money, how stable the company is, etc… 

The data required for fundamental Analysis:

1. Historical Data: To check how the company operated in the past.

2. Publicly Known Information: Company’s public information such as management announcements, Annual Reports, Earnings reports, etc…

3. Information that is not publicly identified but is useful, such as how the leadership deals with crises, situations, and so on.

 Fundamental analysis of a stock usually means looking at a variety of factors that affect stock prices, like:

1. Performance of the industry in which the company operates in

2. Political Impact on the company’s geographical location

3. External politics and relevant trade agreements

4. The financial statements of the company

5. Press releases from the company

6. Media releases on the company and its operations

7. Competitor analysis

 If a company’s fundamental indicators show a negative impact, its share price will most likely fall. While, if the data is positive, such as a strong earnings report, it can improve the company’s share price. 

What are the basic factors of Fundamental Analysis?

A few basic factors must be studied before doing a fundamental analysis of a stock. These factors are the Company’s –

·         structure and revenue 

·         Profits over the years

·         Revenue growth over the years

·         Debt

·         Corporate governance

·         Rate of turnover 

Why use Fundamental Analysis?

• Fundamental Analysis helps us understand if we are buying and selling an overvalued or undervalued stock
• Fundamental Analysis predicts long-term trends in the stock market. This helps individuals with their long-term investments

What are the Two Types of Fundamental Analysis?

There are two main types of fundamental analysis:

• Qualitative Analysis: This method looks at the company’s brand, how its management makes decisions and its financial performance over time
• Quantitative Analysis: This is all about the numbers, focusing on the company’s financial statements to figure out the share price

Even though these methods are different, they’re both important for really understanding a company’s share price.

Fundamental analysis also comes in two flavours: top-down and bottom-up.

• Top-Down Approach: This starts by looking at the big economic picture and then zooms in on a specific company
• Bottom-Up Approach: Here, it’s the opposite; it studies the company first and then considers how big economic factors might affect it

How to do a Fundamental Analysis of a Stock?

Here’s a step-by-step to do a fundamental analysis of a stock: 

• Know the Company: Get to know the company well, what it does, how it works, and its business style
• Dig into Financial Reports: Take a good look at the company’s annual reports or quarterly reports
• Start with Financial Ratios: Use financial ratios to get an initial idea
• Compare Competitors: Find out who the company’s competition is and learn about them
• Look at Debts: Check how much debt the company has and compare it to what its rivals have
• Assess Future Potential: Finally, analyse what the company might achieve in the future

Fundamental Analysis Vs. Technical Analysis

Aspect	Fundamental Analysis	Technical Analysis
Focus	Analyses a company’s financial health, management, industry trends, and economic factors affecting its performance	Examines historical price movements, trading volume, and chart patterns to forecast future price movements
Time Horizon	Long-term perspective, aiming to assess a stock’s intrinsic value and its potential for growth over an extended period	Short to medium-term perspective, focusing on short-term price fluctuations and market sentiment
Decision Making	Helps in determining whether a stock is undervalued or overvalued based on its fundamental metrics and industry outlook	Aims to identify buy/sell signals based on patterns and trends in the stock’s price movement, ignoring company details
Tools	Uses financial statements, economic indicators, earnings reports, and qualitative factors like management quality and Ratios like P/E, EPS, P/B, and DCF models to evaluate stock value	Charts, trendlines, support/resistance levels, and various technical indicators to predict future price movements
Suitability	Ideal for long-term investors who believe in the company’s fundamentals and growth prospects	Suitable for traders aiming to capitalize on short-term price movements, often disregarding the company’s fundamentals

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