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Fundamental Analysis - Definition, Types, Benefits, and How To Do

This document provides an overview of fundamental analysis, which is a method of assessing the intrinsic value of a stock by analyzing a company's financial statements, business environment, and overall industry trends. It discusses the different types of data and factors analyzed in fundamental analysis, including historical performance, publicly available information, and non-public information. The document also outlines the different types of fundamental analysis, basics of conducting an analysis, and benefits of fundamental analysis for long-term investment decisions.

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91 views5 pages

Fundamental Analysis - Definition, Types, Benefits, and How To Do

This document provides an overview of fundamental analysis, which is a method of assessing the intrinsic value of a stock by analyzing a company's financial statements, business environment, and overall industry trends. It discusses the different types of data and factors analyzed in fundamental analysis, including historical performance, publicly available information, and non-public information. The document also outlines the different types of fundamental analysis, basics of conducting an analysis, and benefits of fundamental analysis for long-term investment decisions.

Uploaded by

havo lavo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Fundamental Analysis: A Complete

Guide
2 minutes read

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:

1. historical data to check how things were in the past


2. publicly known information about the company, including
announcements made by the management and what others
say about the company
3. 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 –

1. Qualitative: a study that involves brand value, management


decisions, the financial performance of the company over a
given period, and other similar factors.
2. 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

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