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  1. Beginner Trading Fundamentals: Introduction
  2. Beginning Trader Fundamentals: What is Fundamental Analysis?
  3. Fundamental Analysis: Quantitative
  4. Fundamental Analysis: Qualitative
  5. Beginner Trading Fundamentals: Charting
  6. Beginner Trading Fundamentals: Leverage And Margin
  7. Beginner Trading Fundamentals: Popular Trading Instruments
  8. Beginner Trading Fundamentals: Limiting Risk
  9. Beginner Trading Fundamentals: Strategy Automation
  10. Beginner Trading Fundamentals: Record Keeping And Taxes
  11. Beginner Trading Fundamentals: Conclusion

Fundamental Analysis: Why do it?

 

Whether you aspire to be a professional stock analyst or trader, or if you’re interested in picking up some skills to enhance your abilities in managing your own portfolio, you’ll want to spend some time getting to know the basics of fundamental analysis. Fundamental analysis is a central pillar of investing. Although there are a seemingly endless number of different investment strategies, and there are many types of securities and investment products, fundamental analysis is important to nearly all of them.

 

Given its standing as a cornerstone for investors of all types, it’s surprisingly hard to encapsulate what fundamental analysis is and how it is performed. Generally speaking, fundamental analysis is a method used to evaluate a security in order to determine what the intrinsic value of that security is. Fundamental analysts assume that the stock market is not necessarily correct in the way that it prices securities. Thus, when done properly, fundamental analysis can reveal whether a particular security is overpriced or underpriced, and investors can use that knowledge to make more informed decisions.

 

Fundamental analysts look to a huge assortment of different data points and sources in order to measure intrinsic value. These may include macro and microeconomic factors, the financial statements and figures related to the target security, and broader qualitative aspects of one or more companies as well.

 

In this tutorial, we’ll look at some of the basic elements of fundamental analysis for different types of securities, including both quantitative and qualitative methods of determining value. The pages to follow may be most helpful for beginning investors, as we explore the differences between various types of financial statements. Through the process of fundamental (sometimes called “qualitative”) analysis, investors look to these statements for the basic data that they use to evaluate particular securities. As such, this tutorial will focus on what the balance sheet, income statement, cash flow statement, and other similar items are, as well as how they fit together. We’ll also look at valuation and some of the other factors that can help you to make informed fundamental analysis decisions.

 

Along with this tutorial, you may also find it helpful to read the Investing 101 tutorial and the Stock Basics guide as supplements.

 

Before we begin looking at fundamental analysis in greater detail, we should first ask ourselves: what is it?

 

Fundamental Analysis: Why do it?

 

In this part of the tutorial we’ll take a look at some of the basics of fundamental analysis and explore many of the ways that it can benefit investors.

 

The goal of fundamental analysis is to determine the performance and the overall health of a company or security. Through fundamental analysis, investors aim to identify strong companies and industries as well as fundamentally weak ones. Following the analysis, investors generally make long bets on strong names and short bests on weak ones.

 

Fundamental analysis often aims to provide answers to some of these questions:

 

            1. Is a company’s revenue growing?

            2. Is the company making a profit?

            3. Does the company compare favorably with its competitors?

            4. Can the company successfully repay its debts?

5. Are there any questionable financial practices taking place among the company management?

 

When putting together fundamental analysis for a company, it is often helpful to look at that company’s financial statements, overall health and historical performance, and broader factors such as the company’s competitors and the industry or even the economy as a whole. The ultimate goal of the process is to determine whether or not the company is a good investment, both now and into the future.

 

Fundamental analysis can also be used to measure the state of futures and forex products. In this case, an analyst might focus on factors like interest rates, earnings, employment, housing, production, GDP, and manufacturing rates. On the other hand, fundamental analysis of a bond might include consideration of interest rates, the general state of the economy, and data concerning the bond issuer, such as credit ratings.

 

When applied rigorously and thoroughly, fundamental analysis can provide an excellent view of the true value of a potential investment. The key, then, is knowing which factors to include in a consideration, and securing all of the information in a timely fashion in order to best be able to capitalize on any investment opportunities. In each of the examples above, the data a fundamental analyst would take into account is different. For every case, though, the goal is to be as thorough as possible: any information which may contribute to a better understanding of intrinsic value must be taken into account.


Fundamental Analysis: Quantitative
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