Stock Market
Fundamental Analysis Of Stocks

Normally, people use two important techniques while selecting stocks - fundamental analysis and technical analysis. Simple speaking, the fundamental analysis denotes scrutinizing the cardinal information that have an effect on a company or corporation. In contrast, technical analysis means the review of the stock prices. In other words, fundamental analysis is basically a method of evaluating a security and involves exploring the company's financials and operations, particularly assets, debts, income, sales, products, growth prospective, management and competition from other companies in the industry.

It is possible that many people may discover that they only require fundamental analysis to become flourishing investors. In spite of everything, comprehending and utilizing the fundamental stock analysis has enabled billionaire investor Warren Buffett to become an incredibly prosperous person, perhaps the richest ever. Hence, if anyone desires to be taught about the stock market, it is essential that he or she has eagerness to learn about the minimum basic perception regarding fundamental stock analysis. And, it needs to be underlined here that learning the basics of fundamental stock analysis is worth spending one's time on the subject.

Fundamental analysis

When an investor purchases a stock in a corporation on the conclusion of fundamental analysis, it does not mean that he or she is merely acquiring a piece of paper, instead they are actually acquiring a part of the corporation. Hence, before anyone ventures out to buy a stock in a corporation, he or she should make every effort to learn as much as possible about the company. And doing so it the real meaning of fundamental analysis. Investors undertake research on the corporation with a view to ascertain if investing in it is a sensible venture.

In effect, fundamental stock analysis involves examining sever aspects of the corporation and this includes the corporation's assets and liabilities, its income as well as the burden of debt on it, if any. In addition, it is also important to know who are running the corporation, the type of business the company is in and its competitors. Utilizing the fundamental stock analysis will enable one to choose the stocks that offer the best prospects of making money. When an investor wants to acquire a stock having a reasonable price vis-à-vis its earnings, the fundamental analysts describe it as 'fair value' or a valuation that is reasonable to all parties involved in a transaction in view of all pre-existing conditions and circumstances.

Everyone who is involved with the stock market or is interested in joining it must be aware of the fact that the fundamental stock analysis technique is among the best accepted methods to find out if a particular stock is really a good deal or it is better to avoid it. When an investor has done enough groundwork and intimately scrutinized all the factors related to a corporation, then he or she should be content buying a stock at a high price fearing little risk.

All the same, it is important to note that fundamental analysis is just a technique to enable an individual to get as well as assess the stock that offer superior earnings or return on investments. And as in the other things associated with the stock market, even fundamental analysis is more an art than science. Hence, there is no guarantee that utilizing the fundamental analysis will enable an investor to earn loads of money from stock trading. Moreover, fundamental stock analysis is just one technique and knowing the other methods is always better for an investor. In fact, learning a number of methods will also help an investor to determine whether the fundamental stock analysis best suits his or her requirements.

The concepts behind fundamental analysis

Learn all that you can about the industry

While utilizing the fundamental stock analysis, the first thing that an investor needs to decide is the type of industry he or she should check out. Supposing there is an economic slump, when the unemployment rate is very high and more and more people are making great efforts to escape debt and mortgage, it is wise to take a look at the industries that are normally recession-proof - oil, food and retail. Again, when the economy is out of the depression and back on the rails, the investor may well check out high-flying industries such as technology or the Internet. Though the stock prices of these industries are often extravagant, they not only help to push the market higher, but also yield very high return to the shareholders.

Discover the leading company

Having ascertained the industry or sector that an investor wants to put his or her money in, he or should next try to pick out the companies in that sector that are more sound and gainful in comparison to their business rivals. Supposing an investor wants to put his or her money in the retail industry, as, following extensive research, he or she is of the view that people would soon rush to discount stores with a view to save money. Now the question is, what stores does the investor have in his or her mind - Wal-Mart, Home Depot or any other? In this case, the best way to select stores would be to see which stores have a brand appreciation in the market and also advertise a great deal. Any store that fulfills both criteria is known as an industry leader. The concept behind undertaking such an exercise is simple. If more and more people are purchasing products of a particular company, its sales are sure to go up. In turn, the price of the company's stock too will go up in the market. Hence, in order to search for industry leaders, an investor needs to go after companies having excellent sales and profits with very less or no burden of debt at all.

Have a discussion with the managers

It may be noted here that several shareholders making use of the fundamental stock analysis technique often prefer to have a discussion with the CEO and managers of the corporation whose stock they intend to buy with a view to get an idea regarding how the company is being operated. While talking to the corporation's management, it would be a perfect idea to inquire about the current state-of-affairs of the company, the business it is in, where the management intend to spend the money they would be raising by issuing stocks as well as the present challengers/ competitors of the company. In addition to these, the investor is free to ask about anything else related to the company's earnings, debts etc. Normally, retail investors do not get the opportunity to question the management prior to buying shares in a corporation. It is usually a special privilege enjoyed by the professional fund managers. In fact, the professional fund managers always prefer to invest in companies run by skilled and inventive management personnel who have a vision for the future. In addition, professional fund managers also try to keep away from companies burdened by huge debts, are struggling to hold ground against its competitors or have other obligations, including legal suits. This is basically owing to the fact that these issues more often than not have an adverse effect on the earnings of the corporation.

As mentioned above, an individual or retail investor will hardly ever find an opportunity to sit with the CEO or the top management of a corporation and discuss the company's affairs either over a drink or while playing golf. In fact, it is almost impossible for a retail investor to directly find about the affairs of a corporation before buying its stock. Supposing that some lucky individual investor gets an opportunity to meet the CEO of a corporation to talk about the issues related to the company and/ or the stock, it is unlikely that the official would ever utter a negative word about his or her company. This is a primary reason why interviews with the management are contentious to some extent and also why many professional investors prefer to scrutinize a corporation's balance sheet rather than speaking to it managers.

The balance sheet

A balance sheet, also known as a statement of condition, is defined as a computable abstract of a company's fiscal status or state-of-affairs at a specific instant and includes its assets, accountabilities as well as net value. A balance sheet may be divided into two parts - the first party displaying the entire productive assets owned by a company, while the second part illustrates the different funding systems, such as shareholders' investment and the company's accountabilities. In other words, a balance sheet is a financial report of a company's status and performance and comprises entries that are perhaps only appreciated by an accountant.

Nevertheless, it is actually essential for people to comprehend a balance sheet and thereby understand the company they have or want to put their money in. Despite this, it is unfortunate to note that majority of the people purchase shares in a company without spending any time to go through its balance sheet. It is important to mention that no one should ever spend thousands of dollars by investing in any company until they are aware of a few essential facts about it, such as the earnings and expenditures of a company as well as the debts it has. Once an investor is aware of a company's earnings, expenditures and debts, he or she would definitely be in a better position to decide whether they should buy its stock or discard it.

In order to comprehend precisely what a balance sheet is, let us have a look at some of the entries in a balance sheet (keeping in mind that does not necessarily illustrate or reveal everything related to a company). Nevertheless, any balance sheet will always include the following items:

  • Assets, including all that the company possesses - money, property, real estate, equipment and accounts receivable (the money which is owed to the company by a customer for products and/ or services provided on credit).
  • Liabilities or the accountability of the company in terms of declared, but not paid dividends as well as accounts payable (the money which the company owes to its vendors for products and/ or services purchased on credit).
  • Shareholders' investment as well as the net worth of the company (total assets minus its total liabilities).

Simply speaking, a balance sheet is a summary of all things owned and owed by a company. Reading a balance sheet of a company enables the shareholders of the company to have an idea of its financial state-of-affairs. If an investor wants to comprehend the balance sheet of the corporation he or she has invested in or intents to put their money in better, they should evaluate the company's balance sheet with those of other companies in the same sector. Besides this, an investor should also get hold of the company's balance sheets for the past few years so that he or she is able to get a fair idea of the company's performance in the previous years as well as what could be its prospects in the future.

An investor is always able to get a fair idea of a company's fiscal status and situation provided that the company is not concealing its debts or liabilities. All said and done, it is important to mention that reading a balance sheet requires some expertise, as there are a number of companies that are smart at screening their negative aspects, such as expenditures and debts. On the contrary, such companies always try to overstate their earnings or incomes to misguide the investors. Hence, it is important that the investors remain cautious of this trap.

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