There are two ways to analyze stock for investment and take decisions first is technical analysis and other is fundamental analysis . We have already seen technical analysis ,in this post we are going to talk about fundamental analysis.
Introduction To Fundamental Analysis
Fundamental analysis is a method of analyzing financial and economic factors of the company. It is the method of deciding intrinsic value of a stock . Intrinsic value is very important to take investment decision by comparing it with other stocks. Fundamental analysis is very different from technical analysis .in this we mostly focus on profitability , income , margins growth of the company. It is the parameter of checking the financial health of the company.
Types of Fundamental Analysis
There are two types in fundamental analysis.
- Qualitative Analysis : This includes brand value of company , business model of the company , corporate governance ,competitors and future aspects of the company.
- Quantitative Analysis : This include some financial figures and ratios of the company. Such as Income ,profits ,margins , PE ratios, P/B ratios , cash flows ,debt of the company and many more.
Things to Focus in Fundamental Analysis
Aspects to keep in mind while doing fundamental analysis are,
- Future aspects of company
- Business model of company
- Financial ratios of company
- Competitors of Company
- Growth of company
- Understand the company
Pros and cons of Fundamental Analysis
- Pros : We can easily select the right company for investment among the several companies in market. We understand more about the company. It is very useful for long term investments. It is easy to understand valuations of the company whether it is overvalued , undervalued or fairly valued.
- Cons : It does not gives assurance of profit . We cannot use it for short term trading decisions . It is very time consuming to analysis financials of the company. Sometimes investments after studying fundamentals can also leads towards the loss.