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What is Fundamental Analysis?
Fundamental analysis is one of the methods used to evaluate what is going on in the market.
Fundamental analysis is used to analyse stock trends as well as finances so as to try to ascertain the value of securities. Carrying out fundamental analysis allows a trader to feel more confident with the decisions made as they will be based on data gathered and thus will be properly informed.
Fundamental analysis consists of three main areas:
- The Price-to-earning Ratio
- The Earnings per share
- Revenue growth
Based on these elements, one will be able to review a company’s reputation and stability. A company’s current and historical cash flows along with other statements such as the balance sheet and annual accounts will be reviewed. Fundamental analysis helps traders to make informed decisions, and even if one plans to hold on to securities for a short period of time this is a good way to mitigate risks.
In cases when the market price of stock is lower than its fair market value, an investor will be able to ascertain that that stock is undervalued. In such cases one would typically purchase stock and hold on to it in the expectation that the market price will eventually increase.
Conversely, in case the stock price falls past the current fair market value, one would sell it if the fundamental analysis demonstrates that there is a good chance that there will be a downward trend.
Considering all this, it follows that it is very important for an investor to determine whether stock is over or undervalued. Some factors that should be taken into account to ascertain this include:
- The Revenue growth this is calculated by deducting the previous year’s profit from the current year’s profit, and then dividing the answer with the previous year’s profit. The answer will be a percentage which will show the amount by which the company’s profit increased or decreased over time.
- Earnings per share also referred to as the net income per share. To calculate this you would need to subtract the net income from the preferred dividends. The answer is then divided by the number of outstanding shares.
- Price to earnings ratio also referred to as earnings multiple. This calculation compares the stock’s current sale price to the earnings per share. Investors use this to determine whether they are buying securities at a fair price and if there is a good chance for a solid ROI. A trailing price to earnings ratio analyses prices to past earnings. On the other hand a forward price to earnings ratio is based on projected earnings which are provided by management.
Stocks that are in demand are typically those from dividend-paying companies that have low price to earnings ratios. More often than not these will be trading at a lower price than the fundamentals indicate. Investors will thus buy them with the intention of holding on to them until the market stabilizes itself and their prices increase.
Fundamental analysis is used to analyse stock trends as well as finances so as to try to ascertain the value of securities. Carrying out fundamental analysis allows a trader to feel more confident with the decisions made as they will be based on data gathered and thus will be properly informed.
Fundamental analysis consists of three main areas:
- The Price-to-earning Ratio
- The Earnings per share
- Revenue growth
Based on these elements, one will be able to review a company’s reputation and stability. A company’s current and historical cash flows along with other statements such as the balance sheet and annual accounts will be reviewed. Fundamental analysis helps traders to make informed decisions, and even if one plans to hold on to securities for a short period of time this is a good way to mitigate risks.
In cases when the market price of stock is lower than its fair market value, an investor will be able to ascertain that that stock is undervalued. In such cases one would typically purchase stock and hold on to it in the expectation that the market price will eventually increase.
Conversely, in case the stock price falls past the current fair market value, one would sell it if the fundamental analysis demonstrates that there is a good chance that there will be a downward trend.
Considering all this, it follows that it is very important for an investor to determine whether stock is over or undervalued. Some factors that should be taken into account to ascertain this include:
- The Revenue growth this is calculated by deducting the previous year’s profit from the current year’s profit, and then dividing the answer with the previous year’s profit. The answer will be a percentage which will show the amount by which the company’s profit increased or decreased over time.
- Earnings per share also referred to as the net income per share. To calculate this you would need to subtract the net income from the preferred dividends. The answer is then divided by the number of outstanding shares.
- Price to earnings ratio also referred to as earnings multiple. This calculation compares the stock’s current sale price to the earnings per share. Investors use this to determine whether they are buying securities at a fair price and if there is a good chance for a solid ROI. A trailing price to earnings ratio analyses prices to past earnings. On the other hand a forward price to earnings ratio is based on projected earnings which are provided by management.
Stocks that are in demand are typically those from dividend-paying companies that have low price to earnings ratios. More often than not these will be trading at a lower price than the fundamentals indicate. Investors will thus buy them with the intention of holding on to them until the market stabilizes itself and their prices increase.