Fundamental Analysis is a process using which an investor takes his investment decisions. It defines the company strengths, weakness, forces affecting the company.
Fundamental analysis helps the investor to decide the intrinsic value of a company share. Investors consider qualitative and quantitative factors which are the main part of the fundamental analysis.
Here Qualitative factors include business model, the performance of management, market conditions. The Quantitative factors include the history of the company, Profit/Loss statements, Cash flow statements, and some important ratios.
If you are not doing analysis on the above-mentioned factors then there is a high chance to say that you are not investing but speculating.
Investing through thorough fundamental analysis protect your capital and give future returns but speculating can blow your capital.
Fundamental analysis includes
- Economic analysis
- Industry analysis
- Company analysis
Depending on the situations investor perform the Top-Down approach or Bottom-Up approach. Here the top-down approach means the investor starts his analysis initially with the economics (both macro and micro) and then proceeds to the bottom i.e., industry and company. In the case of the bottom-up approach, it happens in the opposite way.
- Investing without thorough analysis is called as Speculating.
- Investors do analysis on macro and microeconomics, industry (Sector – Ex- Pharma, auto, etc.,) and the company.
- An investor may go with the Top-Down or Bottom-Up approach depending on the situation.
- By taking the above factors into consideration investor decides the intrinsic value of the share and takes the decision on whether to invest or not in that company.
To read the difference between investing and trading read this article Investor vs Trader – Who are you?
Note: Upcoming articles are continuation the current one. This series of articles explains about complete fundamental analysis in a step by step manner.