Fundamental Analysis: How to Become Your Own Stock Analyst?
Let us take a look at how to pick good companies. For that, you need to analyze stocks. There are two main ways: fundamental & technical analysis.
The stock market really isn’t a gamble, as long as you pick good companies that you think will do well, and not just because of the stock price, said peter lynch. How to pick good companies and be a good stock analyst?
To become a stock analyst, you need to open a Demat account so that you can hold your financial assets in electronic form and open a trading account that will help you to buy and sell shares. To make trading easier it is advisable to link your Demat account with your trading account.
Let us take a look at how to pick good companies. For that, you need to analyze stocks. How to analyze stock? There are two main ways to analyze a stock: fundamental analysis and technical analysis. Fundamental analysis tells you what to buy and technical analysis tells you when to buy.
In this article, we are going to discuss fundamental analysis, fundamental means necessary, or something important. Fundamental analysis means evaluating the intrinsic value of the asset of the company and determining the factors that could influence its price in the future. How fundamental analysis is done? Fundamental analysis can be broadly classified in two ways:
1. Qualitative analysis which deals with the management analysis.
2. Quantitative analysis deals with the balance sheet analysis, cash flow analysis, and profit and loss analysis.
These six steps will assist you to determine how fundamentally healthy companies are:
Step 1: Use the financial ratio for initial screening
It is difficult to study the finances of all the companies as thousands of companies are registered with the stock exchange. Financials include a balance sheet, profit and loss of the company, different ratios like dividend ratio, P/E ratio, current ratio, and many more. It is hard to study the financials of so many companies.
A stock screener is a tool that will help investors to sort the available stocks. Technology has made comparison so easy that you just need to select the stock and enter the ratio you want to compare, everything can be derived in one click.
Step 2: Know the company.
The next step is management analysis of the company, it is significant to understand the company as one should know the company, they are planning to invest is good or bad, whether its decision made is compeered towards its objective; the industry the company is belonging is performing well, its competitor is performing good or bad. To understand the company, one should go through the website of the company read its vision, mission, and objectives, history, its products and services, what directors and chairman have to say in the ABOUT column of the website. If you can find the vision, mission, and objective of the company attractive and understandable then you should investigate more or else disregard the fact.
Step 3: Analysis of financial statement
Once you have understood the company and find it captivating you can study the financials of the company like balance sheet, profit and loss statement, and cash flow of the company. The study of the following financial help you decide whether the company can pay its dividend, interests or not. Other financial that may help the investor in making a decision are operating cost, revenues, assets, liabilities, etc. All the statements are made available on the company websites under the investor's relation column financial reporting.
Step 4: Financial obligation of the company
The next step is to check how much the company owes in the market. The borrowings of the company is the important factors for the stock research. A company with a debt-equity ratio less than 1 is considered to be more favourable. A company with huge debt cannot perform effectively and efficiently since the pressure of paying interest and the amount reduces its performing capacity. The debt of the company diversifies the profit which leads to a decrease in shareholders’ interest.
Step 5: Study the peers of the company
Competition is always a good thing; it forces you to do your best. Your competitors decide how well the company is performing in the market. The next step of fundamental analysis is to understand what makes the company unique from its competitors, one should convince himself why he is investing in that company and not its peer company, whether it is pricing strategy, brand value, its low-cost product, future project, etc. stock screener makes peer comparison easy. There were days when one had to note down the competitor's name and perform analysis on the same. Now everything is available with one click. Artificial Intelligence does everything for you.
Step 6: Forecasting the prospects
The future prospects of the company decide how the company is performing, whether the product or services of a company will be in use over a decade. It is bootless to invest in a 4G company where people have started using 5G. The future contracts of the company should be examined with its potential sources of revenue in near future.
Fundamental analysis is one of the tools to analyse the stocks of the company. With the help of fundamental analysis, a stock research report can be prepared to invest. Fundamental analysis is an investment strategy for long term investors who are willing to invest for higher returns.
The best investment strategy is an investment in yourself, the more you learn, the more you earn.