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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

As the name suggests, fundamental analysis focuses on “fundamentals,” but defining this term can be tricky. Fundamentals can be anything from revenue to profit to market share, management quality, relationship with the broader industry and economy, and more. Fundamentals are typically broken down into two categories—quantitative and qualitative:


            1. Quantitative: those factors which are measurable in numerical terms

            2. Qualitative: those factors which are based on the character or quality of the variable

in question.


Qualitative and quantitative analysis are different, but they are both important to making a sound investment decision. In examingin a particular company, for instance, a fundamental analyst may look at quantitative factors like earnings per share, annual dividend payout, and more. At the same time, that analyst may also take into account qualitative factors like brand recognition, management style, and more.


Intrinsic Value


One of the most important terms to keep in mind when learning about fundamental analysis is intrinsic value. Fundamental analysis assumes that a stock market price may not reflect a company’s “real” value. This true value is known as the “instrinsic value” of a stock. If a stock is trading for $20 per share and you have determined via fundamental analysis that the company is really worth $25 per share, you hve found a discrepancy between the market value and the intrinsic value.


Intrinsic value also assumes that, while the stock market may not accurately reflect a company’s true value at any given time, it will eventually reflect the fundamentals. So that company which is selling for $20 per share now will ultimately end up rising in price because of the difference in its intrinsic value.


Of course, to be an accurate and successful fundamental analyst, your intrinsic value estimation must be correct. This is a big unknown. Similarly, you do not know if and when the marketplace will eventually reflect the intrinsic value, provided that it is different from the current market value.


Criticisms of Fundamental Analysis


Fundamental analysis is not the only means of measuring the health of an investment. A separate school of thought exists as well, and that has led to the development of technical analysis as an alternative methodology. Both aim to provide investors with the tools necessary to make decisions with the best perspective possible. However, there are some basic differences between fundamental and technical analysis which are crucial to understand.


One key distinction between fundamental and technical analysis is the view that each takes of the value of a security. On a base level, fundamental analysis assumes that markets are often wrong when it comes to pricing a security. Through careful consideration of the factors described in previous units, fundamental analysis hopes to uncover the intrinsic value of the security in question. On the other hand, technical analysis assumes that the market price of a security already factors in the elements a fundamental analyst would consider. For that reason, technical analysts do not make an attempt at measuring intrinsic value. Rather, they trace statistics generated over time by market activity concerning the security. These factors include past prices and volume, and the goal is to parse out patterns and make more informed predictions about what the price of the security will do in the future.


Fundamental and technical analysis each have their proponents and their detractors. What is the best methodology to use? It depends on your investment strategy and philosophy. Some people feel more comfortable tracing trends in markets in order to estimate price changes, while others look to the bones of the security itself for clues as to its value. Regardless of whether you end up utilizing fundamental or technical analysis more in your investment practices, however, it is helpful to understand the basics of each.


Fundamental Analysis: Qualitative Factors – The Company


There is no doubt that the figures and data found in a business’s financial statements are absolutely key to coming up with a well-formed idea of the strength of that business as an investment. However, that’s not the whole picture. Before we take a closer look at some of the quantitative factors to consider when evaluating a company’s intrinsic value, let’s focus in on some of the qualitative aspects. These can generally be split into two categories: the company itself, and the broader industry of which it is a part. We’ll begin by looking at some of the qualitative factors to keep in mind when evaluating the company itself.


Using qualitative means of measuring a company’s value can be difficult. By definition, qualitative factors are those unrelated to specific numbers and figures, so they don’t allow for the same kind of direct comparison across time or between different competing companies. Still, looking at the qualitative aspects of a business can teach you a lot about what that business does and what its goals are, as well as how it stands up in comparison with similar businesses it may be in competition with. In this chapter we’ll examine some of the most important qualitative factors to consider when performing fundamental analysis, although there may also be others depending upon the security you’re evaluating.


Business Model


One of the most basic and essential questions any potential investor should ask is: What does this company do? The guiding principles of how a company makes its money are found within the business model. Piecing together the business model can be accomplished in a few ways, including by examining any online or written materials the company has released and by looking to the preface to its 10-K filing, as we’ve discussed in a previous unit.


Business models can be quite straightforward or very complicated, and that doesn’t necessarily correlate to the size of the business. A company like Coca-Cola, for instance, is well-known to billions of people around the world. And yet, this business has a straightforward model: the development, manufacturing, distribution, and sale of soft drinks. On the other hand, some companies may surprise you with their business models. A company which seems to be a food distribution service may actually make most of its money off of real estate or royalty fees, for example. In any case, having a fundamental understanding of what a business does and how it earns money is crucial in determining whether that business is a sound investment.


Competitive Advantage


Fundamental analysts also often look to a company’s competitive advantage. Simply put, a competitive advantage is a company’s ticket to continued success over the long term. The goal for all businesses is to develop an advantage over their peers which sets them apart, and then—most importantly—to keep that advantage. What are some ways a business can gain an advantage in this way?


  • A unique product offering, demographic, or other position
  • Clear tradeoffs and distinctions as compared with competing companies
  • Business activities that are well-aligned with the strategy of the company
  • Operational effectiveness (meaning that the company is more successful at accomplishing its activities than other businesses attempting the same activities)




One of the most important factors to the health of any company is its management. There is a reason that top-level executives at companies typically end up quitting or being fired after scandals or even periods of poor sales. Shareholders and boards of directors typically demand that management be effective at guiding a company toward financial success. Many investors believe that even a company with an exceptional business model will not succeed without strong leaders to guide it.


Where can one get the information necessary to assess the strength of the management of a company for the purposes of fundamental analysis? Unfortunately, this can be difficult for individual investors. While professionals and institutions may be able to arrange for direct contact with management, it’s unlikely that an individual will have this type of access. What an individual can do, though, is to research the executives of any potential target company.


Most public companies will provide information about their executives on their websites. This is a good place to learn about the background of those leaders, although keep in mind that you’re unlikely to find any negative information in this space. To get a more personal sense of the leadership style of an executive, keep an eye out for a company’s quarterly conference calls with the CEO and/or CFO. Some businesses may even allow for a period of Q&A that is open to the public. If you are able to ask questions, take advantage of the opportunity. If not, note how the management addresses tough questions that come its way. Are their answers direct? Or do they tend to avoid questions?


The Management Discussion & Analysis (MD&A) portion of the annual report, discussed in a previous unit, may also provide some insight into a manager’s style and opinions. Also, as managers often move between companies throughout their careers, it can be helpful to look to past performance for a sense of an executive’s accomplishments. How did he or she perform while serving as a leader at other companies? Is he or she new to the industry, or does the executive’s past experience translate directly into expertise in this position?


Corporate Governance


Corporate governance refers to policies within an organization which set the structure and responsibilities of managers, stakeholders, and directors. These policies will be set out in a company charter and bylaws. A company with strong corporate governance will have a robust system of checks and balances to ensure that it is as hard as possible for anyone within the company to behave unethically or illegally. Of course, good corporate governance also involves abiding by external rules and regulations as well.


Some companies will issue reports which aim to quantitatively measure how well they abide by corporate governance and how those policies affect stakeholders. Others do not attempt to attach numbers in this way. In any case, though, here are some things to look for in a company with solid corporate governance:


  • Does the company produce financial disclosures in a timely fashion? Are those documents of the highest quality and transparency?
  • Do the company’s policies fundamentally benefit stakeholder interests? Do shareholders have voting rights or other means of accessing the board of directors with questions and issues?
  • How easily can management change at the company?
  • How is the board of directors structured? Does the board feature members from inside and outside of the company?
  • Is the board of directors allowed independence?


All of these factors help to contribute to a broad sense of the strength of a company and its prospects for future success.


Fundamental Analysis: Qualitative Factors – The Industry


At this point, we’ve considered some of the qualitative aspects of a particular company in order to get a better sense of the strength of that company’s fundamentals. There are other important aspects to consider when performing fundamental analysis, however, and some of these are outside of the specific company in question. Next, we’ll take a look at some ways to evaluate the industry in which the company operates.


Looking beyond the target business itself and considering the broader industry is important for several reasons. First, knowing as much as possible about the industry can strengthen your understanding of how an individual company functions relative to its competitors. It’s difficult to know, for example, if a particular business has a competitive advantage over its peers unless you have a sense for what standard practices in the field are. Beyond that, different industries function in widely varied ways, and what works in one area or sector may be completely different from what is necessary for success in another. Some of the ways that industries vary from one another include: customer base, industry-wide growth, competition and market share between firms, regulation, length and type of business cycles, and more.


Customer Base


Knowing how strong a company’s customer base is depends on that company’s industry. Some industries are catered to customer bases of millions of people, while others might serve a small handful. Generally speaking, if a company relies on a very small number of customers for a relatively large portion of its sales, that is a dangerous sign, as losing even one customer could significantly impact the sales figures.


Industry Growth


Will the number of customers across the industry be likely to grow in the future? For some industries, growth figures are close to zero or may even be negative. Technological advancements can contribute to changes in industry growth levels, particularly as new technologies come through and make older ones obsolete. Be mindful of potential limitations to a company or industry caused by these factors.




How competitive is the industry? Are there many businesses vying for the same pool of customers? Or is it a niche field? What are the barriers to entry for a new firm? What kind of pricing power do businesses within the industry enjoy?




The level of external regulation varies considerably from one industry to the next. While regulations are typically set in order to ensure fairness to the public, these regulations can make businesses more or less attractive as potential investment options.


For industries in which a small number of companies dominate (for example, in the case of utility companies, in which each region likely only has a few), governments often regulate the levels of profit those companies can make. Other industries, like the pharmaceuticals area, see heavy regulation as a result of mindfulness over health and safety of consumers. This might impact the timeline of a company in developing and releasing its products to the public: drug manufacturers, for example, must go through years of tests and approvals before being able to sell a new product.


All of these factors may impact an individual business’s bottom line, and this in turn may make that business a more or less viable option as an investment. It’s important to keep all of these factors in mind when performing fundamental analysis.


Next up, we’ll turn over to the quantitative side of fundamental analysis, beginning with an introduction to financial statements.


Beginner Trading Fundamentals: Charting
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