Fundamental Analysis basics 1

Introduction to Fundamental Analysis (Basics)

To conduct value investment, fundamental analysis of any particular company must be done. Here we examine the basics. Fundamental analysis is the examination of the important underlying forces that affect the well-being of the economy, industry groups, and companies. When done well, it will potentially maximise your stock returns and probably make you a lot of money.

The goal of fundamental analysis is to derive a look around and into a company’s fundamentals and, hence, forecast and profit from potential future price movements. At company level, fundamental analysis may involve examination of financial data, management, business concepts and competition. At industry level, there might be an examination of supply and demand forces for the products offered, or there might be an examination of where the good is in the product cycle, for instance. For the national economy, analysis focuses on economic data to assess the present and future growth of the whole national macroeconomy. Thus, to hereby forecast future stock prices, fundamental analysis combines economic, industry, and company analysis to derive a stock's current fair value and forecast future value. If this calculated and estimated fair value is not equal or close to the current stock price, fundamental analysts believe that the stock is either over- or under-valued and the market price will ultimately eventually gravitate towards fair value gradually.

Some people, however, subscribe to a "random walk theory". They basically believe that the market is efficient and hence the prices reflect all available information. Fundamental analysts do not heed these "random walkers" and believe that markets are weak-form efficient. By believing that prices do not accurately reflect all available information, fundamental analysts therefore look to capitalize on perceived price discrepancies. That is where the money is made.

To use the Mr Market analogy, Mr Market has mood swings and is not rational, and hence turns up at your door to give you different price quotations, from which you may profit or lose. Here on this website, we will see how to conduct a basic fundamental analysis using models and ideas provided by Stock Charts.

Later to come on this website:

1) how to conduct a basic fundamental analysis
2) how to read annual reports
3) Warren Buffett as a case study (since it's easier to model and imitate someone successful, and we all know that it can be done his way successfully)