Technical analysis is about figuring out when to buy and sell stocks, whereas fundamental analysis is about knowing what you’re buying. It’s the key to creating money over time via stock investment. Charts and trends may be beneficial, but understanding a company’s finances, business strategy, and prospects for future development can offer you more confidence in your investments.
Let’s talk about what basic analysis is, why it’s important, and how you can use it to make good choices about where to put your money.
What is the meaning of fundamental analysis?
To find out how much a company’s stock is really worth, fundamental analysis looks at its financial statistics, the state of the economy, the quality of its management, and trends in the industry.
What’s the goal?
To find out whether a stock is
Undervalued (trading for less than what it’s really worth, which is an excellent time to purchase)
Overvalued (traded at a price higher than its real value—be careful!)
Fundamental analysis looks at long-term growth and stability, whereas short-term trading does not.
Important Parts of Fundamental Analysis
- Statements of Financial Condition
It is very important to understand a company’s financial accounts.
Balance Sheet: Lists assets, debts, and equity.
The profit and loss statement (P&L) shows how much money you made, how much you spent, and how much money you made after costs.
The cash flow statement shows how money comes into and goes out of the firm.
Look for steady growth in sales, controlled costs, and solid profit margins.
- Key Financial Ratios
These ratios make it easier to see how well a firm is doing:
EPS, or earnings per share, is the net profit divided by the number of shares.
Price to Earnings Ratio (P/E) = Share price divided by EPS.
Return on Equity (ROE) shows how well the firm spends money from shareholders.
The debt-to-equity ratio shows how much money the corporation has to borrow. It’s usually preferable to be lower.
Each ratio explains a different aspect of the narrative. Put them together to get a better image.
- Moat and Business Model of the Company Ask:
What does the business do?
Does it have a competitive edge, such as a brand, patents, technology, or a network?
How much does it rely on things outside of itself?
Strong firms have a business plan that is hard to imitate and that works in the real world.
- The quality of management
Poor leadership may even bring down a wonderful firm.
Check out:
The people in charge of the firm
The CEO and board’s past work
Clear communication
Business ethics and governance
People typically compliment companies like Infosys and TCS for having solid governance and steady leadership.
- Trends in business and the economy
No business works in a vacuum. Get it:
The industry’s potential for growth
Supply and demand in the market
Rules or policies made by the government
How inflation, interest rates, and GDP growth affect everything
For instance, EVs, renewable energy, and digital payments are all likely to increase in India over the long run.
Value that comes from inside vs. market price
Intrinsic value is a critical idea in fundamental research. It tells you how much a company is really worth based on its profits, growth, and risks.
BUY if the market price is less than the intrinsic value.
If it’s higher, WAIT or SELL.
Analysts utilize tools like Discounted Cash Flow (DCF) analysis to figure out how much something is worth.
Strategy for Long-Term Investing
Fundamental analysis is excellent for:
Value investing is purchasing stocks that are worth less than they are.
Investing in dividends (making money via dividends)
Investing in growth means putting money into firms that have a lot of potential to grow in the future.
Warren Buffett is well-known for using this strategy to find “wonderful companies at a fair price.”
Mistakes that happen often in fundamental analysis
Avoid focusing solely on the statistics; instead, consider the company’s strategy and its future prospects.
Too much trust in ratios—numbers may be changed. Check with reports and performance to be sure.
Following the herd: Don’t put money into stocks that are getting a lot of attention without doing your own research.
Ignoring debt: A corporation with a lot of debt might be dangerous even if it makes a lot of money.
Always put fundamentals ahead of FOMO (fear of missing out).
Things to use and tools
Screener.in: Easily look at Indian stocks.
Moneycontrol and Economic Times are two places to get news and financial updates.
Annual Reports: Official corporate reports that may be seen on their websites
Investor Presentations—Learn more about upcoming plans and potential profits.
Get into the habit of doing research.
Last Thoughts
Fundamental research lets you put money into companies, not simply stock symbols. It is a great way to create money over time with little risk. You can keep on to your assets even when the market changes if you know how a business produces money, expands, and gets through bad times.
If you want to buy stocks for the long term or get dividend income, knowing how to do basic research puts you ahead of most retail investors.
