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Trading and Investment Terms

Fundamentals

You might have heard the word fundamentals on TV while watching stock analysis. Fund managers and stock analysts talk about stocks which have strong fundamentals. Fundamental analysis involves evaluating a security to assess its intrinsic value by examining related financial, economic, and other quantitative and qualitative factors. In fundamental analysis, you have to consider macroeconomic factors such as the economy and industry conditions and microeconomic factors such as financial conditions of the company and management of the company. Fundamental analysis focuses on identifying the intrinsic value of the company�s shares and investors take buying and selling decisions based on that information. The main goal of fundamental analysis is to know whether the security is undervalued or overvalued. Some of the most common indicators which are used to assess the fundamentals of a company are � Cash flow � Return on assets � History of profit retention for future growth � Conservative gearing � Soundness of capital management for maximization of shareholders earning and returns In fundamental analysis close attention is paid to the financial statements of the company. After all, they reveal a lot about the current and future health of the company. Key financials of a company includes balance sheet, income statement, and cash flow statements. All these statements provide valuable information about the company. With the help of fundamental analysis, you will get a closer look at the company and will able to understand the performance of the company. To know the financial stability of a company you can check its balance sheet and to forecast earnings and dividends you can check income statement of the company. In fundamental analysis, all data put together to come up with an intrinsic value of company�s share. If the current market price is less than the calculated intrinsic value than the share is undervalued which means you should buy the share because in the near future the value of that share is going to increase. If the current selling price of a security more than the calculated intrinsic value than the security is overvalued which means you should not buy the security because in future the price of the security may come down. With the help of fundamental analysis, investors identify the fundamentally strong sectors and companies and go long in these companies and go short on fundamentally weak sectors and companies. Fundamental analysis is just opposite to technical analysis where the price is forecasted on the basis of historical market data like [price and volume. Performing fundamental analysis requires a lot of hard work and time. But by digging into a company�s financial statements and assess its future prospects, investors can learn when to invest in a company. Buying stocks based on fundamental analysis also protects the investors from the danger of day to day market fluctuations.

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