What Is Fundamental Analysis?

Fundamental analysis study anything that can affect the security's value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management.

The end goal is to determine a number that an investor can compare with a security's current price to see whether the security is undervalued or overvalued by other investors.

• Fundamental analysis is a method of determining a stock's real or "fair market" value.
• Fundamental analysts search for stocks currently trading at prices higher or lower than their real value.
• If the fair market value is higher than the market price, the stock is deemed undervalued, and a buy recommendation is given.
• If the fair market value is lower than the market price, the stock is deemed overvalued, and the recommendation might be not to buy or to sell if the stock is held.

Fundamental Analysis vs. Technical Analysis

Fundamental Approach analysis share prices on the basis of economic, industry and Company Statistics. If the prices of the share is lower than its intrinsic value, an investor buy it, but if he find the price of the share prices is higher than the intrinsic value, he sell and make a profit.

Technical Analysis is based on the assumptions that all information that can affect the performance of a stock company fundaments, economic factors and market sentiments is reflect already in the stock prices.

What is the Importance of Fundamental Analysis?

Fundamental analysis reports tell the investor what is the fair value. Hence, you know whether you are entering a good price for the buyer or the seller. If the current market price is lower than the fair value, also called intrinsic value, then the company/stock is said to be undervalued. If the current market price is higher than the fair value, then the company/stock is said to be overvalued.

VISMINIDA, trained our students how to find the fair value in stock, how to use different method to find the fair value of a stock. How to read the economic data and annual reports of the company.

We will Cover the following topics in Fundamental Analysis.

Three Factors of Fundamental Analysis

Economic Analysis:

Basic Principles of Microeconomics

• Microeconomics is the study of the behavior of individuals and their decisions on what to buy and consume based on prevalent prices which in turn signals where the economy has to direct its productive activities.

Basic Principles of Macroeconomics

• Macroeconomics is the study of "the big picture" in the economy. While microeconomics focuses on individual households and firms, macroeconomics deals with the economy as a whole. In other words, the focus of macroeconomics is on factors that influence aggregate supply and demand in an economy such as unemployment rates, gross domestic product (GDP), overall price levels, inflation, savings rate, investment rate etc. Most of these factors are highly affected by changes in the public policies.

Industry Analysis

Industry Analysis is a study of the following factors.

PESTLE Analysis

• Political
• Economic
• Socio-cultural
• Technological
• Legal
• Environmental
• Based on the cyclical nature, industries can be classified into three categories
• Defensive industries: These are industries that create products and services that have low income elasticity
• Semi-cyclical industries: These industries experience growth in sales during the expansionary phase and decline during recessionary phase.
• Deep cyclical industries: These industries witness extreme cyclicality in their revenues as they are largely driven by economic cycle and/or commodity cycles

Company Analysis

Company analysis, is a part of fundamental analysis, is a method used in the stock market to evaluate the financial health, performance, and overall prospects of a company.

The goal of company analysis is to assess whether a company's stock is a good investment opportunity by examining various factors related to the company's operations, management, industry, and competitive environment.

Business & Governance

To find answers to company specific questions, which include the following:

 (i) What is the company’s business?

(ii) What is the company’s business model?

(iii) Does the company enjoy any competitive advantage compared to its competitors?

(iv) Does the company have the necessary capability to exploit opportunities and to withstand any threats?

(v) Is the company management competent enough to identify and execute the appropriate strategy?

 

(vi) Does the management have a vision for the company’s future and are they able to provide visibility into the expected short-term performance and long-term goals?