What Is Fundamental Analysis?

What Is Fundamental Analysis?

Fundamental Analysis is the statistical method of performing fundamental analysis. It can help to learn the patterns in the historical data and applying it to the future. Essentially, it involves taking a look at the fundamental drivers of the stock and value of a stock. Using such methods, a very good analyst could make an astonishing return for his/her clients. However, there are several different methods of Fundamental Analysis depending on your personality and skill set. The common fundamental ways are Fundamental Indexing, fundamental Dividend Yield and Fundamental Discounted Cash Flow analysis. Fundamental Indexing When you buy a stock, you simply buy the whole company.

What is the difference between Fundamental Analysis and Technical Analysis?

Fundamental Analysis and Technical Analysis is both methods to find out the current undervalued condition of a stock. While Fundamental Analysis compares the current fundamental condition with the past values of the stock, and gives the probability of the undervaluation continuing, the Technical Analysis is used to find out the price level of the stock under different fundamental conditions. How do I read the Fundamental analysis? While there is a difference between Technical Analysis and Fundamental Analysis, Fundamental Analysis refers to fundamental analysis of a stock. In simpler terms, Fundamental Analysis of the stock can be described as a method used to find out the changes in a stock's condition. What are the key factors that determine the fundamental condition of a stock?

What are the types of Fundamental Analysis?

Fundamental Analysis can be divided into four different types: Option Pricing: Price Counterparty Risk (DCM Risk) Option Pricing Option pricing is very crucial in the underlying value of the option pricing, which is helpful in understanding the price movement of the stock price. I will discuss this type in detail next in this article. Conversion price and strike price of the option is a parameter that determines the expected price volatility of the stock price. Conversion Price of an option is the price of the underlying stock (i.e. the stock that will be called or bought at expiration of the option). For example, if you own 20,000 shares of a stock, you can buy a call option at $60 or a put option at $30 with $60 premium or $30 premium.

How to use the Fundamental Analysis for picking stocks?

The fundamental analysis can tell you in a clear way if the stock you are about to invest in is going to give you a good profit in future or not. First, you need to go through the financial statements of the company. This analysis will give you the picture on how much income the company has earned so far and also on how much they can earn for the rest of the year. At the end of every year, many companies would give a "Trailing Twelve Month" analysis on their financial statements. In this analysis, the basic year-to-date analysis is made, where the analysis is done on the 12-month trailing numbers. This also means that you should take into account the trailing numbers to get a rough idea on the yearly results.

Conclusion

The basic rule of fundamental analysis is to look at the cash flows, the sales, and the earnings in order to make an investment decision. One step further is to look at the firm's balance sheet. I believe that the balance sheet of the firm will be the real snapshot of the business, as cash is the main source of money for a business. Therefore, any operation with negative cash flows will send up red flag on the balance sheet.