Learn What is Fundamental Analysis & How to Do it Online | Espresso

What is Fundamental Analysis and How to Do it?

If you have been trading online or wish to start soon, there are a few things that you need to do it. The first and foremost is to open a trading account and a Demat account. The next step is to find suitable stocks that you can invest in.

 

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However, before you invest your money in any stock, it is important to do some research and understand the securities. This can be done in two ways. The first is through technical analysis, and the second is through fundamental analysis.

This article talks about the latter and how you can do it to make better investments decisions using your trading account online.

What is Fundamental Analysis Trading? 

Fundamental trading refers to the process of determining the financial health of a company. Fundamental analysis trading helps you understand the company’s future prospects based on a number of macro and microeconomic factors to find out a stock’s intrinsic value. These factors include the company’s financial condition, business health, the leadership and management of the company, industry conditions, and more.

The analysis is done after taking the company’s revenue, profits, return on equity, future growth prospects, etc., into consideration. This information is then made available for the public and can be used by retail traders as well as institutional analysts while trading online.

How does Fundamental Analysis Trading Help in Trading Online?

Fundamental trading is a lot more detailed than mere speculation. It gives you an insight into the company, its core values, future prospects, and its leadership. Based on the understanding of the company, traders can ascertain how a particular stock would perform in the future. Fundamental analysis helps long term traders gauge if the stock is likely to grow in the future or not. Similarly, stock analysts use fundamental analysis trading to see if the stock that they are recommending for a client has any potential for future growth.

A stock that shows potential for growth is called an overweight stock. If a stock is overweight, its price is likely to go up in due time. If investors buy such a stock, they can get it can a good price and sell it at a profit later. However, if there is no potential for growth and the stock is already overpriced, the stock will be called underweight. In such a case, it may be recommended to not invest in it.
Also Read: Steps to Buy Stocks Online

How to do Fundamental Trading on Your Trading Account?

Once you have opened your trading account and are ready for trading online, you can follow the steps given below for fundamental analysis:

  • Get to know the company: The first step in the process is to understand the company’s vision. You can visit the company’s website and read up about its management, core principles, future goals, etc.
  • Go through the financial reports of the company: The next step is to research the financial statements of the company. You can read the company’s balance sheets, profit-loss statements, revenue, sales, etc.
  • Check the debt: If the company is in debt, it can affect its performance and future profits. So, make sure to check if the company is under debt or not.
  • Check the company’s rank among competitors: The company that is the best among all its competitors can offer you better growth in the future. So, pay attention to its ranking among competitors and peers.
  • Look at the company’s future prospects:  The company’s long-term potential is another crucial factor in fundamental analysis. Try to gauge if the products and services offered by the company will be relevant and profitable many years in the future. It is also important to keep an eye out for any future threats. For instance, Nokia was a thriving mobile company until smartphones took over the market.
  • Make sure to research regularly:  The future is unpredictable, and things can change anytime. So, make sure to keep studying the company’s performance, profit and loss statements, revenues, etc. Know the latest news about the company and its management at all times, so you know when to exit.

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Frequently Asked Questions

The two approaches to fundamental trading are given below:

  • Top-down analysis: As the name suggests, this analysis begins at the top of the economy. You start by analyzing the market at large and then move down to the concerned sector, industry, and company.
  • Bottom-up analysis: Contrarily, the bottom-up analysis starts from the company and then moves up to the concerned sector and ultimately the market.

Fundamental analysis helps ascertain a stock’s intrinsic value based on the company’s future prospects, financial condition, economic conditions, and more. Technical analysis takes into consideration a stock’s past data and performance to predict its future.

Anyone with a trading account who wishes to invest in the stock market can use fundamental analysis.