Imagine you are planning to buy a house in a particular neighborhood. You want to make sure that the house is in a good location, is structurally sound, and is worth the price you are willing to pay. You would likely conduct a thorough inspection of the property, look at comparable sales in the area, and research the local housing market to ensure that you are making a sound investment.
Similarly, when investing in the stock market, you should conduct a fundamental analysis to determine if a company is a sound investment. This involves examining the company's financial statements, evaluating its competitive position in the market, and researching industry trends to determine the company's growth potential.
For example, let's say you are interested in investing in a tech company that produces smartphones. You would first research the company's financial statements to analyze its profitability, liquidity, and financial health. You would look at metrics such as revenue growth, net income, and operating expenses to determine if the company is making a profit and is financially stable. You would also evaluate industry trends and economic conditions to determine if the company is likely to experience growth in the future. Once you have analyzed all the relevant factors, you would determine the intrinsic value of the company to determine if the stock is overvalued or undervalued.
This is what fundamental analysis is all about.
Fundamental analysis consists of three main parts:
Now the question comes to do a fundamental analysis of a stock or a company. As a beginner you can start with:
Understand the company first.
Use the financial ratios for initial screening.(Basic financial ratios and their meanings have been listed afterward.)
Closely study the financial reports of the company.
Find the company's competitors/rivals and study them.
Check the company’s debt and compare with rivals.
Analyze the company’s future prospects.
Determine the intrinsic value of the stock price of the company.
Do not forget to closely monitor the company's performance and make adjustments as needed.
The basic financial ratios one may look at while investing are
Keep in mind that fundamental analysis is just one approach to investing in the market. It is important to consider other factors, such as technical analysis and market sentiment, when making investment decisions.
By- Archit Maheshwari
(Student- Shaheed Bhagat Singh College)