Like we said in a recent post, people’s confidence in their investing decisions seems to ebb and flow with the markets—everyone’s happy during a bull run, but when things get volatile…
Never fear, more help is here! We are going to pick up where we left off in our post about technical analysis—only this time around we’re going to tell you about fundamental analysis.
Fundamental analysis aims to measure a security’s intrinsic value by examining relevant economic, financial, qualitative and quantitative factors affecting the issuing company’s performance.1
The end goal of this analysis would enable a comparison of a security’s price with its intrinsic value.
Determining this intrinsic value might include finding answers to the following questions about a company:
• How does the company stack up against the competition?
• Is growth sustainable in the long term?
• Has the company faced any significant lawsuits?
• What kind of management changes has the company undergone?
• How are political and economic conditions affecting the company?
• Does the company manage its debt and cash levels effectively?
• Do the company’s financial statements include any data points that need further study?
Fundamental analysis also involves researching intangible, qualitative metrics to determine a stock’s potential.2 These may include:
• Customer satisfaction
• Recent management commentary
• Brand recognition
• Barriers to entry
• Effects of industry regulation
• Trademarks and copyrights
Qualitative and Quantitative
Sometimes stock prices might reflect only their quantitative value but not capture all relevant qualitative factors.3
Analyzing tangible and intangible factors together may reveal whether a company is worth more or less than the current market value.
Value investors seek to invest in businesses that they believe have a higher intrinsic value than the market, believing that any investment should be worth significantly more than what you pay for it.4
In simple terms, the larger the difference, the better the investment opportunity might be.5
Learn More About Fundamental Analysis
To learn more about fundamental analysis, consider reading Benjamin Graham’s The Intelligent Investor and Peter Lynch’s Beating the Street.
As you continue to learn about fundamental analysis and put it into practice over time, you might find yourself feeling more confident about your investing decisions in any market conditions.
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1 Investopedia, “Intrinsic Value,” Investopedia.com, 2015.
2 McClure, Ben, “Fundamental Analysis: Qualitative Factors—The Industry,” Investopedia.com, 2015.
3 Investopedia, “Intrinsic Value,” Investopedia.com, 2015.
4 Gad, Sham, “Security Analysis 401: Calculating Intrinsic Value,” The Motley Fool, August 23, 2007.
5 Loth, Richard, “The Greatest Investors: Benjamin Graham,” Investopedia.com, 2015.