Fundamental Analysis of Stocks Explained

  • July 24, 2018

Watch our video on how to understand the fundamental analysis of stocks.

Learning about the fundamental analysis of stocks is one of the cornerstones of trading. That and also technical analysis. Fundamental analysis a broad subject so knowing where to start can help you get off on the right foot with trading. Watch our video below on the basics of fundamental analysis where we show you some handy tools to help make stock research easier for you. 

Fundamental Analysis of Stocks

  • Fundamental analysis of stocks gives you the meat of the company. As a result, you're determining the value of the company by focusing on it's financials. For this reason, you're looking at the well being of it's finances instead of just a companies price movement. You're finding out if a companies revenue is growing. Is it making a profit? Is it strong enough to beat out its competitors?

Can it repay its debts? How's management? Fundamentals of stocks answers the question is this stock a good investment?

Fundamental analysis of stocks is used more for investing as opposed to trading. The goal of investing is to build your wealth over an extended period of time. Trading is the frequent buying and selling of stocks, whether it's trading penny stocks or swing trading.

Fundamental Analysis of Stocks

When you're investing you need the fundamental analysis of stocks because you don't want to invest in an unhealthy company. 

1. Quantitative vs Qualitative: Fundamental Analysis of Stocks

Fundamental analysis of stocks is broken down into two categories: quantitative and qualitative. Quantitative is measured by numbers.

Qualitative is measured by quality which is less tangible than numbers. It's the importance of it's executives and brand recognition.

Yes, numbers are important but so is brand recognition. However, let's consider a company like Amazon for example. If you're going to invest in this company you might look at it's dividends, earnings and other  stuff.

However, you can't make a complete analysis without considering it's brand recognition. Sure any company could sell books, electronics, groceries, basically everything you need. But Amazon has world wide recognition. As a result, it contributes to it's success (try our stock picks service free for 14 days).

Technical Analysis vs Fundamental Analysis

  1. Technical analysis vs fundamental analysis basics:
  2. Fundamental analysis deals with company financials.
  3. Technical analysis analyzes the paper trail from the fundamentalists.
  4. You can't hide what fundamental traders do from the charts.
  5. Technical analysis shows the buy and sell signal areas on charts.

There are two different analysis tools used in investing. Fundamental analysis of stocks uses concrete information about the business of a company to try and find it's real value.

In fact, you're judging it's health. In essence, the price of the stock doesn't really enter the equation.

However technical trading uses market activity, past price and volume. Indicators like moving averages and VWAP are an integral part of helping you to determine an entry and exit.

Fundamental analysis is long term. Technical analysis is short term.

1. Financial Statements and How They Help

As you're using fundamental analysis of stocks to find a good investment, look at a company's financial statement. It tells you the overall health of a company.

A financial statement uses the income statement, balance sheet and cash flow statement. The income statement gets the company's income by subtracting the expense from the revenue.

The balance sheet is comparing the assets against the liabilities and the stockholder equity. And the cash flow shows the money taken in and given out. Fidelity has a really great research tool that breaks down in depth a companies financials. Things like EPS (earnings per share), market capitalization, revenue growth, and the essential research categories on a stocks performance.

You can use Fidelity's research tool for free but you might need to make a small deposit to unlock all of its features.

2. A Company's Performance

Not only do numbers matter but so does a company's performance. You want to know it's hitting it's goals. If you're making a long term investment you don't want a company that's going to keep falling short of the goals it's setting.

Do you want a company that hits it's profit targets? Or a company that falls short. Hence healthy companies hit their goals (bookmark our penny stocks list and stock watch lists pages, which are updated daily).

Fundamental Analysis of Stocks

Your goal is to determine the worth of a stock for an investment. How does the market value a stock?

3. Economic Forecast

The economic forecast helps when you're fundamental analysis of stocks. When the economy is declining companies and sectors suffer. When you're investing you usually holding a stock for a long time (read Bullish Bears Review posts from our members).

You could see your portfolio suffer. On the other hand, it doesn't last forever. You could even add to it in spite of the economic decline.

In 2008 we had a crash. Companies, sectors and the portfolios of people suffered. They recovered in time. If you were retiring at that time, it might not have been good though.

Summary: Fundamental Analysis of Stocks Management

Management is important to consider in fundamental analysis of a stock. That may not seem like something you'd even consider. But without good management a company could die.

Assess the strength and weaknesses management could have. As well as their capabilities. A company could have so much potential. The business model could be dynamic. But if management is bad that goes to waste.

Just like bad management can hurt a company, good management can take a a solid company and have extraordinary success in an industry.

Can management deliver on it's promises? Sometimes you have to walk away if the company has potential but the management is a problem.

Fundamental analysis of stocks is used to invest in companies long term. Company health and finances matter to the long term investor.

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