What is fundamental analysis?

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Who doesn’t love a game of cricket? It’s fun, gripping, and if you’re Indian, it goes without saying that most likely, cricket is life. Kids love the game, your neighborhood uncle loves the game, and why, even financial analysts love it! Why, you ask? Well, because this game can help explain so many complex concepts in a simple manner.

Don’t believe us? We’ll convince you of that in a while, because a game of cricket can help you understand what fundamental analysis is all about.

Say you’re tasked with picking the captain for a cricket team. How do you go about choosing the right guy? If we’re right, you’ll probably consider these numbers or factors.

  • The player’s past performance
  • His strike rate
  • The player’s average
  • His conduct on the field 

This is just how fundamental stock analysis is done.

You’re no professional cricket analyst. But still, you were able to perform a basic analysis of the performance and other facts and figures before choosing a captain for your team, isn’t it? In fact, you likely perform this kind of an analysis all the time, for various everyday situations.

Let’s look at two scenarios that you’ve most probably been in, and let’s see how asking the right questions can help you make the right decisions.

Choosing an outfit at the store

Picking a destination for your vacation

For what purpose do you need the outfit?

What time of the year do you want to head out on your vacation?

What kind of an outfit are you looking for?

Do you want a beach vacation, a city vacation, or perhaps a trip to the mountains?

What size should it be in?

How many days do you plan to take a vacation for?

Do you have any color in mind?

What kind of weather do you want to enjoy?

What’s your budget for the purchase?

How many people will be accompanying you?

Is there a particular fabric that you prefer?

Is there any specific cuisine that you want to try?

Do you need some accessories to go along with the outfit?

What is your budget for the flight prices?

Is there a specific brand that you prefer?

Do you want a laid-back vacation or an adventurous, action-packed trip?

 Isn’t this how you make decisions in everyday life? In fact, it’s so normal that you don’t even realise how many metrics you factor in with ease.

When you apply this kind of analysis to a company to decide if it’s worth investing in, you’ve arrived at what fundamental analysis is all about. Now that you’ve understood it in layman terms, let’s look at the definition of fundamental analysis.

What is fundamental analysis?

Fundamental analysis is a technique that is used to determine the value of an asset. It focuses on the many underlying factors that affect the company’s future aspects and its actual business. Fundamental stock analysis helps you analyse the economic and financial well-being of an entity.

In other words, it helps you determine if the price of a stock is in tune with the actual value of the stock. The price, you see, is what you pay, while the value is what you get.

An example to understand fundamental analysis of a company

For instance, take the shares of Eicher Motors.

On March 13, 2020, the price of one share of Eicher Motors was Rs. 17,672.15.

By April 3, 2020, the price dropped to Rs. 12,680.05 per share.

Looking at these numbers, it may be common to conclude that the company isn’t a good investment choice. However, take a look at how its share price bounced back up by June.

On June 24, 2020, the price rose up to Rs. 18,436.85 per share.

Wrapping up

What does this tell you?  Well, it shows you that minor price fluctuations may happen frequently. But a fundamentally strong company with value has a greater potential to deliver good returns in the long run. 

And how do you figure out which company is fundamentally strong? Yes, you got that one right. You can do this with fundamental analysis of a company. As we’ve seen, you need not be a professional analyst to get started with fundamental stock analysis. You only need to learn the right techniques, and for that, we’re here to guide you. Keep going with this module to learn all about fundamental analysis of a company.

A quick recap 

  • Fundamental analysis is a technique that is used to determine the value of an asset. 
  • It focuses on the many underlying factors that affect the company’s future aspects and its actual business. 
  • Fundamental analysis helps you analyse the economic and financial well-being of an entity.
  • It helps you determine if the price of a stock is in tune with the actual value of the stock.
  • Price is what you pay, while value is what you get.
  • Minor price fluctuations in a stock’s price may happen frequently. But a fundamentally strong company with value has a greater potential to deliver good returns in the long run. 
  • To figure out which company is fundamentally strong, you need fundamental analysis.
  • You need not be a professional analyst to get started with fundamental analysis. You only need to learn the right techniques.
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Comments (2)

कुमार स्वराज

25 Nov 2020, 12:09 AM

Far better than Zerodha's Varsity

pranay sitaram

11 Nov 2020, 04:23 PM

realy
this is very east to learn
thanks
smart money angelbroking ................................

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