1. How to Analyze Stocks Using Fundamental Analysis
Making the right stock selections for your portfolio is key to smart investing. Your investment decisions should be based on your understanding of the stock in question and not just an emotional response.
Analyzing stock fundamentals provides you with a holistic understanding of the stock and the company. Using this strategy can help you look at it from various angles to determine the business's true value to help you make your investment decision.
Here is what you need to know about fundamental stock analysis.
2. What are stock fundamentals?
Stock fundamentals provide data to determine a particular company's real or fair market value. This estimate that an investor develops based on their research is sometimes referred to as the company's 'intrinsic value.' Investors who want to use value investing or similar strategies find this type of research particularly helpful.
With value investing, an investor wants to find companies valued lower than their actual value, and this may indicate a good investment. The investor assumes that the market will correct the mistake over time, and this stock will increase in value.
So back to stock fundamentals.
When using this research strategy, you will look for two main types of information about the business.
- Qualitative fundamentals. These traits include brand-name recognition, the business's reputation, the organization's market share, and the type of competition. These factors can be a bit challenging to measure and are more subjective.
- Quantitative fundamentals. These indicators give you more concrete, measurable data. You look for factors such as the business's revenue and profits, and these factors are significantly more objective. For this reason, many investors will use them as a core part of their market research.
You can take different types of information and weigh them together to give a complete picture of the company, its progress, and what it offers its customers. Investors can then make an informed decision on whether or not to invest in this particular stock.
3. How to analyze stocks using fundamental analysis?
To build a fundamental understanding of the stocks in question, you will want to gather different data sources, as looking at only one type of information will not suffice.
4. Collecting your quantitative data
You should gather at least the three most important financial statements issued by businesses: income statements, balance sheets, and cash flow statements. Using these three pieces of information at a minimum can give you excellent insight into the financial state of this particular company.
The balance sheet details the company's assets, liabilities, and equity. A balance sheet can show you how well a company balances what it owes— liabilities— versus the value of what it owns.
The income statement helps you see how the business performs over time. You will see how much revenue and expenses the business had over the given period. If you consider the balance sheet to be a snapshot of the business at the time, the income statement demonstrates more progress over time.
The cash flow statement will show you how money flows in and out, the money used to operate the business and how much cash comes in from financing versus investing. It provides you with a solid understanding of company success.
5. Collecting your qualitative data
Collecting your qualitative data can be more challenging because investors have to consider how to interpret the information they collect about the business. Knowing who the CEO is, is great information, but you also need to deduce whether the business's leadership will take the company in a good direction.
Staying up to date on organization-related news is one of the best ways to engage with qualitative data. Looking at various sources of information can help you collect a balanced point of view.
Keep up with the latest press releases and announcements from the business. This information can help you see the business's innovation and development, which you can compare to the rest of the industry.
As you compile your qualitative data, you should concentrate on answering a few questions.
- How does this business make money? Get specific with your answer. Understand their business model.
- What gives this business a competitive advantage? Is it a strong brand name or an innovative product? Know what sets the business apart.
- How is the business managed and governed? Look at the policies in place to guide the business. Learn about the people in charge of the company. Examine how they performed in past positions. See how the business responds to shareholders.
Answering these questions can help you form a better understanding of the business.
6. Get started investing
Analyzing stocks according to their fundamentals gives you a better look into the company's value and performance. Understanding company value can help you make better investment decisions. Use a fundamentals analysis and find the stocks that fit your portfolio.