Fundamental Analysis
What Is Fundamental Analysis?
Fundamental analysis (FA) measures a security's intrinsic value by examining related economic and financial factors. Intrinsic value is the value of an investment based on the issuing company's financial situation and current market and economic conditions.
Fundamental analysts study anything that can affect the security's 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.
Fundamental analysis involves evaluating a company's financial statements, management, industry position and market conditions to determine its intrinsic value. The end goal is to determine a number that an investor can compare with a security's current price to see whether the security is undervalued or overvalued by other investors.
Fundamental analysis involves evaluating a company's financial statements, management, industry position and market conditions to determine its intrinsic value. The end goal is to determine a number that an investor can compare with a security's current price to see whether the security is undervalued or overvalued by other investors.
The two distinct categories of fundamental analysis types are qualitative and quantitative. The foundation of qualitative fundamental analysis is the quality of a given entity, such as the board, financial performance, products, management, or brand. Subjective opinion characterizes qualitative analysis. For instance, you believe Bajaj Auto's goods to be superior to TVS Motor Co.'s. This viewpoint is qualitative.
Numbers are added in quantitative fundamental analysis. The financial statements are the primary source of quantitative data. It is not arbitrary. It is imperative to conduct a qualitative and quantitative basic study of a company. You can't prioritize one above the other.
KEY TAKEAWAYS
- 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.
- If the fair market value is lower than the market price, the stock is deemed overvalued, and the recommendation might be not to buy or to sell if the stock is held.
- In contrast, technical analysts favor studying the historical price trends of the stock to predict short-term future trends.
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