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Fundamental Analysis- Why is it Important for Investors?

Fundamental Analysis- Why is it Important for Investors?
Fundamental Analysis- Why is it Important for Investors?

It is often claimed that a trader has a short-term vision, while an investor has a long-term vision. But, for an investor to have a long-term vision for his investments, there has to be some rationale behind his investments in equities. That rationale ideally has to be “Fundamental Analysis”.

Fundamental analysis of a stock is used to determine the financial and business health of a company. It combines financial statements, management pedigree, external influences, events, and industry trends. It is important to note that the intrinsic value or fair value of a stock does not change overnight. Such analysis helps you identify key attributes of the company and analyze its actual worth, taking into account macro and microeconomic factors.

Investors who prefer fundamental analysis to technical analysis believe that the price of a company’s stock isn’t always an accurate gauge of the company’s value. By conducting fundamental analysis, an investor can identify a stock they believe is undervalued by the market and is also fundamentally strong and choose to invest in it with the hope that it will rise in price in the long term as the company’s value becomes apparent to the market over time. Similarly, an investor could choose to sell a stock they’ve been holding that has gone up in price because fundamental analysis tells them that it is now overvalued by the market and there are some serious problems with the fundamentals of the company.

Types of Fundamental Analysis?

There are two main types of fundamental analysis –

Qualitative: a study that involves brand value, competition, industry analysis, management decisions, the financial performance of the company over a given period, and other similar factors.

Quantitative: an analysis that is purely number-based and considers the company’s financial statements and various financial ratios that help an investor to see the company from various angles.

How to Do Fundamental Analysis of a Stock?

Fundamental analysis of a stock is a detailed exercise before an investor comes to the conclusion whether this stock is worth investing in or not but here are some important steps to start the fundamental analysis of a company.

  • Understand the company, its operations, business model, etc.
  • Check the Management track record.
  • Check the past performance of the company.
  • Use the financial ratios for initial screening.
  • Closely study the financial reports of the company.
  • Find the company’s competitors/rivals and study them.
  • Check the company’s debt and compare it with rivals.
  • Analyze the company’s prospects.

Fundamental analysis is generally used for long-term investments and it allows you to find good companies for investment, such as those with strong growth potential.