Understand fundamental analysis

Understand fundamental analysis

All equity analyzes attempt to determine whether the securities are being properly valued within the wider market. Fundamental analysis is usually done from a macro to junior perspective in order to identify which securities are not being priced properly by the market.

Analysts usually study, in order, the general state of the economy and then the specific industry strength before focusing on the performance of the individual firm to arrive at a fair market value per share.

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Fundamental analysis uses general data to evaluate the value of inventory or any other type of security. For example, an investor can perform a fundamental analysis on the value of a bond by looking at economic factors such as interest rates and the general condition of the economy, then

Study information about a bond issuer, such as possible changes to its credit rating.

For stocks, fundamental analysis uses revenue, earnings, future growth, and return on equity,

Profit margins and other data to determine the core value of the company and the potential for future growth. All of these data are available in the company's financial statements (more on that below).

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Fundamental analysis is most often used for stocks, but it is useful for evaluating any security, from bonds to derivatives. If you think about the basics, from the broader economy to the details of the company, you are doing a fundamental analysis.

Investment and fundamental analysis

The analyst creates a form to determine the estimated value of a company's share price based on publicly available data. This value is only an estimate, opinion of the educated analyst, of what the company's share price should be equal to the current market price. Some analysts may refer to the estimated price as the company's intrinsic value.

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If an analyst calculates that the value of the stock should be significantly higher than the current market price of the stock, he may publish a buy or overweight rating for the stock. This serves as a recommendation for investors who follow this analyst. If the analyst calculates an intrinsic value below the current market price, then the stock is considered overvalued and a recommendation to sell or reduce weight is issued.

Investors who follow these recommendations expect that they can buy stocks on positive recommendations because such stocks should have a higher potential to rise over time. Likewise, stocks with unfavorable ratings are expected to have a higher probability of falling prices. These stocks are candidates for removal from the current portfolios or adding them as "short" positions.

This stock analysis method is the opposite of technical analysis, which predicts the direction of prices by analyzing historical market data such as price and volume.

Quantitative and qualitative fundamental analysis

The problem with defining the word fundamentals is that it can cover anything related to a company's economic well-being. Obviously, it includes numbers like revenue and profits, but it can also include anything from a company's market share to its management quality.

The various fundamental factors can be classified into two categories: quantitative and qualitative. The financial meaning of these terms is not much different from their standard definitions. Here's how the dictionary defines the terms:

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Quantity - "related to information that can be shown in numbers and quantities." 1

Quality - "related to the nature or standard of something, not its quantity." 2

In this context, quantitative fundamentals are difficult numbers. They are the measurable characteristics of businesses. This is why the largest source of quantitative data is financial data. Revenue, profits, assets, and more can be measured with great precision.

The qualitative fundamentals are less realistic. It may include the quality of the company's chief executives, brand recognition, patents, and technology.

There is no qualitative or quantitative analysis that is better in nature. Many analysts consider it together.

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Qualitative basics for consideration

There are four main fundamentals that analysts always keep in mind when dealing with a company. They are all quality, not quantity. They include:

Business model: What exactly does the company do? This is not as clear as it appears. If the company's business model is based on selling chicken for fast food, is it making its money that way? Or is it just a rush on royalties and franchise fees?

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