What is Fundamental Analysis in Share Market || Types of Fundamental Analysis || Pros and Cons of Fundamental Analysis

What is Fundamental Analysis in Share Market || Types of Fundamental Analysis || Pros and Cons of Fundamental Analysis.

Whenever we start our investing journey, we have often heard people saying that if you had taken $500 shares of Apple, Tesla, Google many years ago, you would have millions of dollars in today's date. But here comes the question that 15-20 years ago who knew that all these companies would one day become multibagger stocks.

It can be found, if we do proper fundamental analysis of any company, then we can invest in any such company which will later become companies like Apple, Tesla, Google.

Today we are going to talk about fundamental analysis, what it is and how we can do fundamental analysis.

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What is Fundamental Analysis?

So Fundamental Analysis is a process by which we understand the basic working model of the company. Meaning in this we analyze what is the main work of a particular company. How it earns revenue, how it works and how to be a value investor in this world. 

He always worries about one thing whether he is buying the shares of a company at an expensive price or at a cheap price. Because the MRP of TV or any grocery item is fixed, but there is no MRP of shares. It is available to us at current market price. Hence fundamental analysis helps us to analyze whether the current share price is fair or not.

If we look at the current share price of Apple Inc, it is around $160. But is it right to buy this stock at this price? We will know this only by doing fundamental analysis. Now, in order to analyze through this process, it is very important for us to know how the company runs and works. What is the scope of the industry he is in, and many more questions remain to be answered.

Why Is Fundamental Analysis So Important?

So let's take this as a simple example. Suppose you want to buy a pen in the market. The shopkeeper is giving you that pen for $5 so would you buy it and similarly if you get a pen for $0.05, here because you know very well that a pen will cost $0.1 or $0.2. So if you are getting the pen at a discount or at a premium price, there must be some valid reason for both. 

For which the shopkeeper is telling its price. So today you go to buy shares of a company. For example if the current market price of Apple is $160, then your job as an investor here would be to buy Reliance shares at less than its actual value. 

For example, if Apple's fair value is $200, then taking the stock at $160 is a good option. But same if its fair value is $100 then this share becomes expensive here then why would you want to buy any share expensive. So fundamental analysis will save you from buying any expensive stock.

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Finding Fair or Intrinsic Value

So now the question arises that how to find out the fair value of a company or in investing we also call it intrinsic value, then how to find out. So there are some tools by which we can arrive at the fair value of a company. So let's know what are these tools. Therefore, generally investors use 3 types of tools, through which they can reach the fair value of any company.

Analysis of Financial Reports: The first tool is the analysis of financial reports such as Balance Sheet, Income Statement, Cash Flow, all these statements give us an idea of the financial position of the company, how many assets and liabilities the company has. How much does she earn, how much cash does she have and how much does she spend and how much profit does she make.

Earnings: Earnings, such as quarterly earnings and projected future earnings are also very important.

Financial RatiosFinancial Ratios, like EPS, PE RatioROE, PB etc. must be checked before investing.

Types of Fundamental Analysis

Now let's talk about the types of fundamental analysis, fundamental analysis is done in two ways. First qualitative and second quantitative.

Quantitative Analysis

So if we talk about Quantitative Analysis, then in this we judge the companies through numbers and figures. That is, we will analyze all the data, such as how much is the profit, how much is the debt, how much are the assets, how much are the liabilities and all this we will find out from various sources, such as knowing. 

The company's cash inflows and outflows will analyze its cash flow statements. From which we will know how much the company actually earns in cash and how much it spends. Then we can analyze the balance sheet in which we can find out all the assets, liabilities, income, expenses and everything of the company.

 Similarly, we will also see the profit and loss statement of the company. Many more ratios like PE ratio, PB ratio, debt to equity ratio and many more will reveal the position of all the data of the company.

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Qualitative Analysis

Now let's talk about qualitative analysis, in it we will look at everything except numbers and digits. Basically we will see the quality of that company in which we have to understand the main business model of that company what services and products they provide to their customers and how much demand they have in the market also we will see the development of industry that company and Even the management, how are the people managing that company and how efficient are they in making their decisions. 

The corporate governance of the company will also be seen and it will also be seen how strong or weak its competitors are. All this will be covered in quantitative analysis and you will get all this information related to the company from the annual report.

So whenever we do fundamentals it is very important to analyze both these tools because here we are trying to understand about its main working and trying to know the company.

Pros and Cons of Fundamental Analysis

So now let's talk about whether fundamental analysis is a good thing or a bad thing. So like there is something bad and something good in every human being. Similarly, in fundamental analysis there is good and there is bad.

Pros of Fundamental Analysis:-

So first let's talk about some good things about fundamental analysis. Fundamental analysis creates a deeper understanding about the company in the mind of the investors. 

If someone uses fundamental analysis, then he will be able to know a lot about that business and knowing that he will be sure that the company in which he is investing his hard earned money is the right company. It helps you in taking the right decision.

After Fundamental Analysis, because you get to know about the company completely, then if there is something wrong in that company, then you will know immediately and if the company has the potential to move forward, then you will understand that too. will come. ,

Through fundamental analysis, you can spot any underrated companies that are undervalued in the public eye but hold enormous value. As we understood from the very beginning that 15-20 years ago no one knew that Apple and Amazon would become such big companies. 

If anyone had these underrated companies at that time, he would have made millions in today's date.

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Cons of Fundamental Analysis:-

Now let's talk about the shortcomings or disadvantages of fundamental analysis. The first disadvantage is that it is a very time consuming process. In this because so much reading and analysis has to be done that sometimes it takes a lot of time to read, understand, analyze so much and then take a decision somewhere.

Suppose if you and I are analyzing the same company, it is possible that my interpretation of the company is different and yours is different. May be after doing full analysis a company may look expensive to me at a share price of $100 but you may find it cheap. Now only time can tell whether your assumption will be correct or mine.

Sometimes a person is not able to control his/her mindset or emotions and even if he/she analyzes the right company and has the ability, by asking 10 people he or she can predict the bull or bearish trend of the market will not buy it after seeing it. Due to this he may or may not buy a good company at the wrong time. Like any investment strategy, analysis also does not guarantee that you will get guaranteed returns from the stock market.

Even after doing so much research and analysis, your decision may be wrong. But if we keep even 10 stocks in our portfolio and one or two of them turn out to be multibaggers, a lot of wealth can be created. Even if some stocks give moderate returns.

 And whether you are a value investor like Warren Buffet or Peter Lynch today, everyone follows fundamental analysis and is a long term investor.

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