How to do fundamental analysis
In this post, we are going to see what is fundamental analysis and how it is useful in equity research.
Many of you might have heard of this term—fundamental analysis, but don’t know the meaning of it.
Fundamental analysis concept
Fundamental analysis is a method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors.
Fundamental analysts cover macroeconomic factors, like overall economy and industry conditions and management of companies. So, economy-industry-company analysis is a part of fundamental analysis.
Fundamental analysis of stocks
The end goal of fundamental analysis is to produce a value that investors can compare with current market price in hope of figuring what sort of position to take in that particular stock/company.
So, if the security is under-priced, then go for ‘Buy’, and if the security is overpriced then, ‘Sell’.
Difference between fundamental and technical analysis
1. Technical analysis aims to estimate short term price movements, fundamental analysis focuses on determining long term values.
2. Technical analysis takes into account price and volume of the security, whereas fundamental analysis focuses on basic factors related to firm, industry and economy.
3. Technical analysis attracts short term traders. Fundamental analysis attracts long-term investors.
So technical analysis is more to do with short-term trading and fundamental analysis is used for long-term investments.
Through this post I wanted to give you a very basic idea about fundamental analysis. In next posts, I’ll cover fundamental analysis frameworks.
Any queries on fundamental analysis?