Fundamental Analysis

There are two main categories of traders : fundamentalists and technicians. Fundamentalists are those traders who use fundamental analysis to predict price action , and technicians are traders who use technical analysis to predict price action. Today , a lot of traders use both types of analysis.

For now , lets review about fundamental analysis , which is based on economic factors.

Fundamental analysis is the practice of evaluating a company’s stock price by comparing base elements in the company’s balance sheets as well as general market factors. The main principle of fundamental analysis is to find profitable companies to invest in by comparing revenues , sales , management , etc. Fundamentals include earnings report , dividends , sales , inventories , profit margins , P/E ratio , market share , etc. …

Those looking to invest in a company will be the most likely to use fundamental analysis. This is because the research is used to not just look at the value of the company , but to look at the company itself. This includes the results of its finances and it’s potential to grow. The fundamentals can give a better picture the entire company , not just a snapshot. This means that analysis is used to look at the long term of a company not just the short term.

The basic idea is if you put a dollar into the business ( in the form of buying the stock ) how much of a return can you expect. How much yield will you likely see and / or how much growth will you experience based on the operation , markets , competitors and costs of the business. Obviously , not all aspects of these fundamentals can be quantified.
The most common way that fundamental analysis is done in is in three steps:

1) The first step to this type of analysis includes looking at the macroeconomic situation. This includes GDP , growth rates , inflation , interest rates , exchange rates , productivity and energy prices.

2) The next step taken in analysis in this category is looking at the industry as a whole. This includes total sales , price levels , competition and their effects , foreign competition as well as any entrances or exits from the industry.

3) Last in this process of studying the fundamentals includes looking at the company individually. This includes looking at unit sales, prices, new products, earnings and any chance of debt or equity occurring.

You can either use this procedure as a top down one or a bottom up one. It just depends if you start with the individual company , the bottom up option , or the reverse , known as the top down analysis.

As you can see there are many aspects involved with carrying out good analysis of the the fundamentals of a company. But the basics are pretty easy to understand. Fundamental analysis is an invaluable tool for those who run businesses or are looking to invest in one. This is because it is able to look at the bigger picture and give a fuller view than other older methods.

I was always confused between fundamental analysis and technical analysis when I first started. Later I found a good way to differentiate them. I remember fundamental analysis tells you What to buy and technical analysis tells you When to buy.