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Fundamental Analysis in Investing

8 October 2009 - News - Editor

A dictionary definition of the word "fundamental" describes it as "being an essential part of, a foundation or basis" and this is certainly true when it comes to fundamental analysis in investing. When the market is flourishing, even an uninformed investor has a good chance of making some money, but in today's economic climate, the more reliable information an investor has and understands, the more likely he is to reap some rewards. So what does fundamental analysis involve?

The ultimate goal of fundamental analysis is to determine whether the company's stock is a good investment, and while it includes looking at trading patterns of the stock, it also focuses attention on any data that may impact the price, as well as perceived value, of the stock in question. This assessment of a company’s well-being and future prospects requires getting down to basics regarding the very foundation of the company and identifying the intrinsic value of its shares based on a wide range of criteria. This primarily involves examining the financial statements of the company, assessing revenue, cash flow, income and expenditure, assets and liabilities, among other aspects. In addition to examining the quantitative aspects of a company which can be measured in numerical terms, analysts may include qualitative aspects which are based on the largely immeasurable aspects of the company, such as its goodwill, market share, brand name recognition, patents and the capability and reputation of its management team.

One of the key factors of fundamental analysis is in establishing the intrinsic value of the stock, based on the belief that the price on the stock market is not an accurate reflection of the stock's true value. Another assumption is that at some point in the future (although no-one can with certainty say when that will be) the stock market will reflect the fundamentals. So by performing a fundamental analysis on a particular business, investors can gauge its intrinsic value and identify opportunities to buy at a discount with a view to making some money when the market catches up to the fundamentals.

 


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