Fundamental Analysis for Beginners

Fundamental analysis is the detailed assessment and analysis of a company’s future or growth, which gives a fair idea about its worth in the stock market. It involves careful study of the revenue, expense, sales, asset management tools, liabilities, and all the financial aspects dealing with an organization’s performance and survival. It’s the best way to determine whether the stock in question is valued, undervalued, or being traded at a fair price.

Need for Analysis

The elements that decide the value of a stock, keep fluctuating due to a variety of reasons. Ideally, it’s market value or current rate should almost be the same as its real value. But, the market price is either more or less than its original value. This deviation may prompt people to buy or sell a share. If the price is less than the intrinsic value of the stock, we ideally buy it, and if the stock is overpriced, we sell it. This is exactly where fundamental analysis comes in picture. In order to determine the real value of a stock, a number of parameters have to be scrutinized. Hence, it is all about evaluating a security’s value, based on an authentic set of information.

Stock Fundamental Analysis

Consider an investment of USD 100 in a stock which rises to USD 120. The profit gained is USD 20 or 20%. Now consider another company’s stock which has USD 1 as market price and it rises to USD 2 in the same trading session. This is a 100% rise in the value. If you invest in 10 stocks of this company, the earnings would double, in this case USD 20. Thus, it can be seen that a lower-valued tax can fetch better profit on a relatively small investment. There are many companies in a wide variety of sectors which don’t have much in common. All organizations listed on the market have some factors mentioned in the beginning as their ‘investment friendliness’ measures. Revenue, assets, and liabilities are some common aspects of any firm across different business segments. These factors gives us a broader perspective for comparison between various firms, and also highlighting the best deals on offer.

Technical analysis is many a time confused with fundamental analysis by the beginners. The former one is a type of stock research, which is based only on the market prices, their volatility, and the trends of a company’s performance graph concerning the rise or fall of its stocks. The most important difference between both is that, technical analysis never deals with the real value of a stock. It is essentially a study limited to the market positioning and behavior of a firm. The concept of fundamental analysis can be applied in many different areas. For example, its scope can extend to bonds and their assessment, based on the economic factors that govern it, such as credit ratings or the condition of the parent economy.

Techniques

– EPS ratio (Net earnings/Outstanding shares): If a firm earns USD 20 per share, and the outstanding share or divisions of earning is 4, each investor will earn USD 5. But, if the outstanding share is 2, then the earnings per share for an investor is USD 10. Thus, higher EPS ratio can be a basic analysis tool.
– P/E ratio: This stands for the price per share/earnings per share ratio. The price of a single share of a company as compared to its earnings on that share is decided by the market acceptability of that organization. If the firm’s share is valued much more than its earning, it signifies a rising stock. This factor clearly states the relative earnings of a company as compared to the other listed firms.
– Projected Earnings Growth (PEG): The P/E ratio divided by the percentage future growth over a defined period gives the projected earnings. A share with P/E ratio 20 and a growth of 10% for say next one year, has a PEG of 2.
– Price of a share/ sale price of that share (P/S): This factor is the market’s designated value for the sale of one share.
– Price of a share/ Book value of a company share (P/B): This states the theoretical value calculated for a share.
– Dividend yield and dividend payout ratio: Earnings of a firm/ stock value of the share gives the yield for a stipulated period; whereas, a payout ratio is the Annual dividends paid by a firm to its EPS.

A successful investment involves detailed market observation based on the above factors, which are incorporated in the analysis procedure. Warren Buffet of Berkshire Hathaway and Peter Lynch of Fidelity Magellan Mutual fund, are prime examples which tell us that fundamental analysis could play an important role in a person’s wealth creation.

Types of Investments

Investment is the process of risking one’s savings in the hope of a monetary gain. An investment involves the act of using a good or its money equivalent to create another good or fetch the returns of the invested amount in terms of interest or profit share. The basic purpose of an investment is to hold an asset in order to obtain recurring or capital gains. Take a look at the various types of investments.

Aggressive Investment: Aggressive investors invest in stock markets and business ventures. This type of investment can involve the act of investing in a real estate, renovating it, and renting it out. Aggressive investment involves a greater amount of risk.

Business Management: The value of the business assets is determined after which they are used to generate revenue. Business assets can be physical, financial, or intangible. Physical assets include property and machinery that is in possession of the business. Financial assets include the liquid assets of a business and the company stocks and bonds.

Conservative Investment: Conservative investors invest in cash. They put their money in investment accounts like savings, mutual funds, and certificates of deposit.

Economics: In context of economics, investment is the per unit time production of goods, which are not consumed and are rather used for production in the future. Tangibles like property, as also intangibles such as the costs incurred in on-the-job trainings are included in this type of investment. Income and interest rates form the determinants of an investment decision. A growth in income boosts investments while a rise in the rates of interest is not conducive to greater investments as it makes borrowing money costlier.

Finance: Investments in finance refer to the cost of capital invested in buying financial assets and securities. They include investments made in shares, bonds, and equities. Investments in the finance sector are made through banks, insurance companies, and other investment schemes. Learn all about the different types of insurance.

Foreign Direct Investment: When a company from one country invests in another country, it is known as foreign direct investment. This investment is generally of the physical form with the intent to build a factory in another country.

Investing in Gold: Investments in gold can be done through ownership or by means of certificates and shares. Here is a list of the types of gold investments.

Bar: Buying gold bars in one of the very traditional ways of investing in gold. It is practiced in Argentina, Austria, and Switzerland where gold bars can be purchased from major banks in these nations.
Coins: Coins, which are priced according to their weight, are purchased in this form of investment in gold. The British gold sovereign and the Swiss Vreneli are some examples of bullion coins.
Accounts: Swiss banks provide the customers with gold accounts which can deal in gold transactions.
Gold Exchange-traded Funds: In this scheme of investing in gold, gold can be traded on major stock exchanges.
Spread Betting: Firms in the UK offer spread betting in gold investments. Spread betting is about predicting the rise or fall in the prices of gold before investing in it.
Investing with the Mining Companies: Trading in the shares of gold mining companies is one of the means of investing in gold.

Investing in Silver: Investing in silver is similar to investing in gold. The various ways in which one can invest in silver are also the same as those for gold investments.

Land Investment: Land investment can turn out to be a long-term and rewarding investment if the purchased land is developed properly.

Moderate Investment: The investments made in cash and bonds and those which involve low or moderate amounts of risk, are known as moderate investments.

Personal Finance: Personal finance includes the money that is put aside on a regular basis with the aim of saving it. Mere saving of money involves only the risk arising out of devaluation of the saved amount due to inflation. However, saving money and investing it involves the investment risks like capital loss. Learn more about personal finance planning.

Philatelic Investment: The investments made in collectible postage stamps with the intent of making profits are known as philatelic investments. Rare stamps can serve as unique pieces of art and excellent collectibles. Investors dealing in stamps have chances of benefiting from the nation’s growing wealth. Know more about philatelic investment.

Real Estate: Investment in real estate is the one made in purchasing property. Property is purchased with the intent of holding or leasing. Residential real estate investment involves the process of buying other people’s houses while the investment in commercial real estate involves the purchase of a large property that can be rented to a company. Commercial real estate investment is riskier than that in residential real estate.

Socially Responsible Investing: This investment strategy aims at fetching financial gains for a social cause. Investors prefer investing in practices that promote human rights, equality, environmental awareness, and other social concerns.

Stock Investment: There is a rising interest among the masses for investing in the stock market. Stock investments can prove to be rewarding if share trading is done wisely.

Value Investing: It involves buying securities whose shares seem under-priced.

Investment is after all, the means to channelize money in order to secure one’s future. I am sure you would want to consult an efficient investment adviser for guidance on investing wisely.