Fundamental Analysis

Having an abundance of wealth can support your family and help you fulfill your dreams and needs. Yet, people tend to have a single source of income like a 9-5 job or business. Indians usually save their earnings for the future and only a few of them invest that savings by buying commodities (like gold and silver) or keep in the bank as a fixed deposit which gives them an annual return. But the interest rates have shrunken over past years, hence, the earnings from a fixed deposit are minimal.

The rates of fixed deposits are interlinked with inflation. So, in the forthcoming years, we can expect the rates to plunge. But we need not worry as we have a stock market which has been giving great returns for years and long-term investors have created their empires based on this source of income. In India, only around 2% of the population trade and invest in the stock exchange and under this market size, most the individuals depend on tips circulating the market.

There is a lot of noise around buying a share in the stock market. People tend to react based on tips and buy a company’s share. Most people rely on that one indication and invest their hard-earned money. That's pretty much gambling because you invested based on a random hunch or assumption that the price will further rise and you’ll make a profit. But imagine if it backfires on you and leaves you with a huge loss. 

Most individuals trading or investing in the stock exchange rely on tips from news channels, their friends and brokers, but they don’t take their time and try to learn about the company’s financials. Here comes the role of fundamentally analyzing a company that will help you understand the company’s work and help you decide whether to invest in the company for a long period.

The prudent investor never relies on assumptions; they dive deep and study the company. Fundamental analysis is a vital and core skill in an investor's toolkit for evaluating a corporation on the idea of its track record: sales, earnings, dividends, products, management, as well as the economic and industry outlook.

  • It is a value-based approach to stock exchange investing — solid and prudent — that typically offers handsome profits to the long-term investor.
  • It clearly explains, with examples, all the analytical tools of economics, industry and company analysis, including ratios and cash flow. 
  • It shows you ways to gauge a company's management and its products and find out what lies behind the figures and notes in a company's annual report.

And, most usefully, how to calculate the intrinsic value of a share. Fundamental Analysis will help you to base your investment decisions on relevant information, not tips, hunches or assumptions.

Doing the company’s analysis will help you make solid, consistent long-term profits. Legendary contemporary investors like Warren Buffett and Peter Lynch basically used this approach to amass fortunes on the stock market. So can you. Once you master the essentials of fundamental analysis, you would be able to pick stocks of companies with future high growth.

You might be thinking: what's the difference between fundamental and technical analysis?

Technical analysis is relevant for short-term investments and the objective is to identify the right time to enter or exit the market. Traders make the decision based on the market trends and prices of the stock. They focus on past data by reviewing charts and predicting the future price, based on different indicators and chart patterns.

Whereas, investors take the fundamental analysis route to make a decision based on the financial ratios and prospects. They focus on both past and present data, economic reports and industry statistics. A prudent investor holds their investment for the long term in a bet of higher returns. 

The key takeaways -

  1. Understand the business model.
  2. Know your industry.
  3. Review the financial ratios.
  4. Take a look at the prospects.
  5. Balance sheet, cash flow and annual reports are key.
  6. Invest only if you can hold the shares for a long period.
  7. Emotions lead you nowhere.

Learning fundamental analysis can do wonders for retail investors and not having to rely on ‘tips’ is the greatest boon that comes from it.

4 responses to “Fundamental Analysis”

  1. Samriddh Jaiswal says:

    Great Research and Content 👍

  2. Tapish pachori says:

    Really great content

  3. Kedar Haridas says:

    That’s a great insight article for ameture investors. Very well written 👍

  4. Deepal M says:

    Wow… That’s some amazingly researched content.

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