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Fundamental analysis is a broad subject; it’s tough to know where to start from. There is no end of the strategies being used and which are quite different from each other, almost all use the fundamentals. Fundamental analysis involves digging into financial statements. It is also known as quantitative analysis. This involves looking at revenues, expenses, assets, liabilities and other financial aspects of a company. Fundamental analysts look at this information to gain insight on a company's future performance. Basically it’s a cornerstone of investing. There is a myth that if you are not performing Fundamental analysis that means you are not really investing.

The fundamental analysis is a tool that attempts to determine a security’s value by focusing on quantitative and quality factors that affect a company's business and its future prospects. You can perform fundamental analysis on economy.

Factors of fundamental analysis:

  • Quantitative factor is capable of being measured or expressed in numerical terms. Quantitative fundamentals are numeric, measurable characteristics about a business. Quantitative factor represent aspects of a company's business that are difficult or impossible to quantify, incorporating that kind of information into a pricing evaluation can be quite difficult. You should be aware of Business Model, competitive advantage, management, corporate governance etc.
  • Qualitative factor is related to or based on the quality or character of something, often as opposed to its size or quantity. They are the less tangible factors surrounding a business. You should be aware of market share, industry growth, competition, regulation etc.

Neither qualitative nor quantitative analysis is inherently better than the other.

Goal of fundamental analysis is to make financial forecasts and the fundamental analysis is done on the historical and present data. Let’s discuss some highly important objectives of Fundamental analysis. It is done to calculate credit risks. It also make internal business decisions, it is also used to make projection on its business performance. It is also used to conduct a company stock valuation and predict the price evaluation. One of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock’s “real” value.
Concept of intrinsic value takes place in fundamental analysis. It is important to address the subject of intrinsic value. In the long run, the stock market will reflect the fundamentals. There is no point in buying a stock based on intrinsic value if the price never reflected that value. Nobody knows how long “the long run” really is. An investor can estimate the intrinsic value of a firm from where they can buy at discount. Basic thing is that you don’t know whether your estimate of intrinsic value is correct and even you don’t know how long it will take for the intrinsic value to be reflected in the marketplace.

When we talk about fundamental analysis it is quite necessary to know what exactly financial statements are. Financial statements are the medium by which a company discloses information concerning its financial performance. The fundamental analyst use the quantitative information gleaned from financial statements to make investments decisions.

Three most important financial statements are:

  • Income statements
  • Balance sheets
  • Cash flow statements

The income statement measures a company's performance over a specific time frame. Technically, you could have a balance sheet for a month or even a day, but you'll only see public companies report quarterly and annually. The balance sheet represents a record of a company's assets, liabilities and equity at a particular point in time. The statement of cash flows represents a record of a business' cash inflows and outflows over a period of time. The cash flow statement is important because it's very difficult for a business to manipulate its cash situation.


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