What is Fundamental Analysis?
Fundamental analysis is a type of analysis you could use to identify the companies or stocks you want to invest in. Fundamental analysis takes into account multiple factors and how they may influence the company’s future growth prospects, to see if the company is overvalued or undervalued.
There is no way to accurately predict how a stock would perform, but fundamental analysis is a good tool for investors to choose companies to invest in.
What are the factors considered during Fundamental Analysis?
Some factors that are evaluated during fundamental analysis are related to the company, and are available in the company’s financial statements – like its revenue, profit, profit margin, Earnings Per Share or EPS, Price to Earnings ratio, etc.
Some other factors relate to the economy, like its growth rate, the rate of inflation, government policies, etc. You should be familiar with most of these terms since we’ve talked about them in the past.
Why should someone use Fundamental Analysis? What are the advantages?
Fundamental analysis doesn’t focus just on short-term trends. It takes into consideration past, current and future information not just about the company, but also the sector in which it operates, and the economy as a whole. Therefore, it provides the most well-rounded picture about the company’s future, and the best forecast of its stock price.
Are there any disadvantages of Fundamental Analysis?
One disadvantage of Fundamental Analysis is that it might be time consuming. However, if you’re a long term investor, a few extra hours isn’t a lot since you’ll reap the benefits for years to come.
Who should use Fundamental Analysis? Does it need any special skills?
Any investor wanting to invest in the stock market for the long term should use fundamental analysis. It doesn’t require any special qualifications, and the information required to perform fundamental analysis is freely available on financial websites.
Is Fundamental Analysis the only type of stock analysis you can perform?
No, there is another type of analysis called Technical Analysis. Click on the video about Technical Analysis on your screen to learn more.