Basics of stock market: What is fundamental analysis?

If you’re about to begin an investment journey in the stock market, there are few industry terms that you must have absolute clarity on. One such financial jargon is ‘fundamental analysis’. It studies the underlying health of a listed company to assess the intrinsic value of a stock. This is because the current price of a stock may not always represent its actual value. Fundamental analysts take into consideration various quantitative as well as qualitative factors like a company’s revenues, profit margins, return on equity, future growth potential and other metrics to determine its true value and potential.

Often termed as the backbone of the stock market, fundamental analysis helps you make improved investment decisions while trading in the stock market. You can figure the real performance of any company by crunching data and numbers. This also helps you assess whether a particular stock is currently undervalued or overvalued.

Both fundamental and technical analysis are types of techniques used to make better investment decisions. However, there are few differences between the two approaches. While the former is based on economic and financial factors, the latter analysis historical stock movement to predict its future performance. Primarily, fundamental analysis is a long-term approach that incorporates new market information, technical analysis is a short-term approach that focuses on the past performance of the stock.

Fundamental analysis helps an investor develop a thorough understanding of the company, its business model and the working of management. Since it strictly involves numbers, the chances of experiencing loss due to any kind of personal biases are limited. You can also spot threats and potential red flags by going through the financial reports of the company. In the long term, this information will enrich your investment and wealth generation.

Overall, fundamental analysis is time-consuming and doesn’t count herd mentality in its predictions since it’s strictly based on numbers. Every investor should enjoy the benefits of fundamental analysis to better their investment portfolio in the long run.