| It is not necessary to be a professional stock analyst | | | | expressed in terms of money or numbers |
| but a clear understanding of how fundamental | | | | -qualitative: economic factors that cannot be |
| analysis works is a critical requirement to be a | | | | expressed in numbers and involve the use of |
| successful stock trader. If you want to bring a | | | | judgment. |
| professional approach to picking stocks that you | | | | While this may seem unnecessarily complicated to |
| going to trade, you can hardly succeed if you do it | | | | you, think for one moment about the enormous |
| with a pin. Fundamental analysis is the foundation of | | | | range of factors that influence the performance of a |
| value investing and it is hard to see how you can | | | | company. While it is easy to comprehend numbers, |
| succeed unless you are gambling. | | | | you can't really judge whether a company stock is a |
| The financial analysts often use complicated analysis | | | | worthwhile investment without considering things like |
| techniques but the concepts are fairly | | | | the quality of management, the act of their brands |
| straightforward and it is the goal of this article to | | | | of proprietary intellectual property and so on. For |
| enable a newcomer to stock trading to finish with a | | | | instance, you can analyse the financials of a company |
| grasp of the basics. The heart of fundamental | | | | like Citibank but can you really evaluate the |
| analysis is what is called "quantitative" analysis. This | | | | investment without considering the enormous |
| involves examining the financial statements put out | | | | advantage of the that company brand? Without the |
| by a company such as income statements or cash | | | | advantage of the brand, the company would be just |
| flows and balance sheets to try and evaluate the | | | | another purveyor of sugared water. Any fool can |
| company's future performance ( let us never forget | | | | start a company that sells sugared water but would |
| that stock prices are determined largely by investor | | | | you really consider this company could be on the |
| expectations of future earnings). But number | | | | same level as the company selected? |
| crunching is not all or computers would be extremely | | | | So we see that fundamental analysis involves a |
| successful traders. The second part of fundamental | | | | balancing act between qualitative and quantitative |
| analysis involves what is called "qualitative" analysis | | | | factors. However, let us go back to the question: |
| which is using your judgment to evaluate the findings | | | | why should we go through all this trouble? A major |
| of the quantitative analysis and to examine factors | | | | assumptions in fundamental analysis is that the |
| which cannot be quantified. | | | | company's stock price does not always reflect its |
| Fundamental analysis concentrates on the economic | | | | true value. This has two implications-you can sell |
| factors that underlie performance of a company in an | | | | stock that you believe is over valued and buy stock |
| attempt to establish what the company is actually | | | | that you believe is under valued. This brings us to the |
| worth. Necessarily, this involves the company's | | | | second major assumptions in fundamental analysis. In |
| financial statements rather than stock price | | | | the long term, stock prices will tend to reflect the |
| movements and their implications. You are actually | | | | intrinsic or true value of the company. As a value |
| trying to answer questions such as: | | | | investor, you will naturally be looking to pick stocks |
| -is the company actually growing in revenue and | | | | that trade below what you believe is the intrinsic |
| profits? | | | | value and then expect the stock price to correct |
| -is this growth sustainable for the future? | | | | itself upwards. The two uncertain factors here on |
| -is it in a strong financial position? | | | | the accuracy of your intrinsic value estimate and the |
| -are the accounts reliable as a guide to performance? | | | | time taken for the stock price correction. |
| And hundreds of such similar questions. The bottom | | | | So we see that it is possible to be a successful stock |
| line is that you are trying to establish whether the | | | | trader by using an intelligent mix of qualitative and |
| stock is a worthwhile investment. | | | | quantitative analysis. You should be warned that no |
| The factors that you would be considering in your | | | | two is perfect and that you could make mistakes in |
| analysis will fall into one of the two following | | | | your analysis. The remedy for this is to diversify your |
| categories: | | | | investment and not put all your eggs in one basket. |
| -quantitative: factors that are capable of being | | | | |