If you have been in the market, you must have heard the term analysis. An analysis is the process of going through the information and then making predictions about how the market will perform.
There are two primary methods – Fundamental Analysis and Technical analysis.
Talking about technical analysis – it is a good method for finding the perfect entry and exit time in the stock market. In technical analysis, we look into charts, trends, and patterns. With these tools at your disposal, you can make good profits in your investment.
However, fundamental analysis is the actual tool if you want to find multi-bagger stocks to invest in. To get multiple times returns, you need to be invested in a stock for the long term. This can only happen when you have enough information and are confident about how the stocks will perform.
What is Fundamental Analysis?
Fundamental analysis is a method that talks about the intrinsic value of the stock, unlike technical analysis, which only talks about the current value.
The stock market is all fluctuated. Price changes every day. Hence, it isn’t easy to find the stock’s actual value. That means the current price of the stick may not reflect the actual price of the stock.
Because of the FOMO, the stock might be undervalued or overvalued in the market. The only way to find the real value of the stock is by fundamental analysis.
Now, the question is, how is it done?
Fundamental analysis is done by using different qualitative and qualitative factors. This might include the following.
- Company’s revenue
- Return of equity
- Profit margin
- Future growth potential
- Trends and other metrics
The main purpose of this method is to identify companies for profitable investment. Many big investors look out for opportunities to invest by running fundamental analyses in the market.
Importance of Fundamental Analysis
What is the definition of investment? Investment is putting your money in a stock that has the potential to give multiple times ROI. Is that possible in one day, one week or one month? NO! You need to hold the stock for years for such results.
Technical analysis will help you get good results based on current numbers and metrics. But to show confidence in holding the stock for years, you need to run down a fundamental analysis of the market and stock you are investing in.
Fundamental analysis is a credible method that analyzes the stocks and the health and performance of the organization.
Fundamental analysis helps gauge the real value of the stock by predicting the future price movement. At the same time, it helps the investors measure the company’s potential to survive in the market and beat its competitors.
Tools Used In Fundamental Analysis
There are different tools used in fundamental analysis to predict the future price movement of stocks. This includes –
- Financial reports.
- Financial ratios.
Perhaps the following example will help you better understand how fundamental analysis works.
Let’s just say Michael is an investor and has $50 to invest. After searching for the right stock, he finally gets his hand on one he can invest in. But, just because he has the money to invest, investing without knowing the stock’s intrinsic value is a fool’s way of making an investment.
Instead, Michael observed the stock trading at $45. Using fundamental analysis, he knows that the company is doing great with revenue and financial reports and has the potential to grow in the next year.
Michael realizes that the stock price will increase to $60 in the next year. This way, he can know the intrinsic value of the stock. Knowing the undervalued market, Michael was able to make a decision that would make him earn $15 on each stock.
How To Perform Fundamental Analysis Of Stocks?
Here are the six steps that you need to perform to analyze a company’s fundamentals in any stock market. They are really simple and effective. Here it goes.
Step 1:Understand The Company
It is important to understand the company you want to invest in. This gives you an idea of how the company is performing, whether it makes the right decisions, its profit-loss statements, operating cost, revenue, and expenses.
Visiting its website and learning about its goals and its future plans for the business will show you the healthy signs for the company.
Step 2: Study The Financial Reports
Once you analyze the company and its nature, it’s time to read its financial reports. You should start analyzing their balance sheets, profit-loss statements, and revenue.
You can use these data to evaluate CAGR, sales, and if the net profit has increased in the last five years.
Step 3: Check The Company’s Debt
Debt is an important factor to consider. Most of the company’s profit goes into clearing up its debt. If the company is under a load of debt, there is no point in investing. You might have to wait a long time for your returns.
Expert investors avoid investing in such companies and look for companies with a debt : equity ratio > 1.
Step 4: Find The Company’s Competitors
You cannot just invest in any company. You would want to invest in a company that is among the best or at least has the potential to become one of the best.
Try to find the companies that are performing better than their competitors and offer better future prospects, new plants, and upcoming projects.
Step 5: Analyze The Future Price Movement
Fundamental analysis is most effective when you want to be in the market for long. So invest in the companies whose products will be in the market for at least two decades. This will ensure you a stock for long-term investment and multiple times ROI.
Fundamental analysis is an old-school method to find strong companies for long-term investment. Here in this article, we have discussed its importance and the steps you need to follow.
We hope that you were able to learn something new and will be able to implement it in the stock market.
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Author: Mashum Mollah