Fundamental Analysis is a process of analyzing a stock to determine its intrinsic value (the fair price of a stock) by evaluating relevant economic, financial, non-financial, and other quantitative and qualitative factors.
In simple words, fundamental analysis helps to evaluate the health and the performance of any company. It tries to give you the following answers:
- Is the company’s experiencing a rising revenue?
- Does the company make an actual profit?
- Can it beat its competitors in the future?
Let us understand the need to learn fundamental analysis with the help of an example.
Let us say, you do not know how to fundamental analysis. You want to invest for the long term in any stock. We have two stocks; one is Tata Motors and the second is Chaman Lal Setia. Which stock would you prefer for investment? Many of us will choose Tata Motors as we hear this brand every day. Your decision of selecting a stock will be emotional. But if you know how to fundamental analysis, then your opinion of investing would be different.
If you know, Tata Motors is in net losses from the last 5 years and it might possible that its losses increased further, and they might shut down the business. On the other hand, the stock price of Chaman Lal Setia rose from 2 to 40. Fundamental of this company is good and this is doing great in the market.
That’s why we need to learn fundamental analysis. It helps up to show the broader picture and to make the right decision while selecting a stock for a long-term perspective. When we know fundamental analysis, we will make decisions based on what we see, not emotionally.
“ Fundamental analysis tells you what stock to buy.”
Learning fundamental analysis helps you to know the following:
- Predicting the future price movement
- Determining fair price
- Management evaluation
- Determining the company’s ability to beat its competitor
- Analyzing the company’s financial strength
Getting the answers to these questions helps you to buy the right stocks for portfolio building and keep you motivated to stay invested even during the market fall.