How to Use Fundamental Analysis to Invest in Stocks
Investing your money in stocks can be intimidating and overwhelming. Before putting your money into anything, you need to perform an analysis of the brand you want to invest in.
A key aspect all investors need to be aware of is the role of fundamental analysis. There’s a huge amount of misunderstanding regarding what it is and how to do it.
Here’s what you need to know about starting fundamental analysis research.
What is Fundamental Analysis?
A fundamental approach to investing money is about determining the intrinsic value of a stock. It’s not about how cool or valuable the general population believe a stock is.
There are two major ways to start fundamental analysis, which are:
Top-Down Analysis – This begins with the broader economy and how the markets are doing. You’ll then look into how the stock market is doing with regards to specific sectors, before settling on a selected company.
Bottom-Up Analysis – Bottom-up analysis is the reverse. You begin with your selected company and work your way up to the wider market.
There’s no single best approach to fundamental analysis research. It’s a matter of personal preference as ultimately you will be diving into exactly the same information.
The Value of Fundamental Analysis
Relying exclusively on the charts to manage your own investment portfolio means you have a major blind spot. Fundamental analysis focuses on a company’s story and its potential to grow in the future.
You’ll look into a selected company’s objectives, cash flow, and leaders to determine whether a stock is potentially undervalued.
For novice investors to succeed, both technical and fundamental analysis must be implemented as part of any investment strategy.
Two Types of Fundamental Analysis to Choose From
Top-down and bottom-up analysis focus on the direction of your analysis. Fundamental analysis research can be boiled down to two different categories.
Quantitative Fundamental Analysis – This focuses on the things that can be actively measured. You’ll inspect the company’s financial statements and balance sheets to conduct this type of analysis. Entirely different interpretations can be derived through inspecting these figures.
Qualitative Fundamental Analysis – Concentrate on factors that cannot be easily measured. This requires experience and involves looking into factors like the company’s business model and corporate structure.
Both types of fundamental analysis are important. There is a significant amount of interpretation involved. The only way to get better at this is through experience, so keep an open mind when coming to conclusions based on the above information.
5 Tips for Conducting Fundamental Analysis Research
Fundamental analysis is complex and requires a significant time investment to carry it out correctly. However, it remains one of the best tools to manage your finances.
Here are five tips for getting started.
- Use Reputable Sources
Trustworthy data sources are at the heart of reliable analysis. Tools like the U.S. Securities and Exchange Commission (SEC) and corporate websites are excellent resources.
You can also use third-party tools like Benzinga Pro. This enables you to access a range of company releases and news all from a single user-friendly dashboard. Read this review on Benzinga Pro to find out more about how these third-party tools work.
- Read Mainstream News
It’s important to know what the general public thinks about a company. Social media sites like Reddit and mainstream news organizations, such as CNN and CNBC, are excellent sources of information.
Building up an idea of public perception can inform your fundamental analysis research conclusions.
- Complete Background Checks on Decision-makers
A critical aspect of investing in a company is to understand who runs it. Dig into the backgrounds of their leaders and get an idea of their experience and track record.
If a CEO has a long history of running highly profitable companies, that’s a major boon. On the other hand, if the company’s CFO has bankrupted every company he’s ever worked for, you may want to consider other investments.
- Search for Undervalued Stocks
The point of fundamental analysis is to find the stocks that are undervalued and are likely to outperform in the future.
For example, if you’ve found a company suffering a market decline, fundamental analysis can explain whether it’s a short term thing or a cancer that’s likely to grow. If it’s the former, there’s a high chance you’ve happened upon a great investment.
- Go for Your Gut Feeling
Unlike technical analysis, this type of research is very much about personal interpretations. Ultimately, the most successful investors learn to trust their guts.
Over time, you’ll develop an instinct for when you’ve happened upon a great stock, and vice-versa.
With the rise of alternative investing apps, too many investors spend too much time arguing about which is the best investing app, rather than on researching the things that matter.
Fundamental analysis is not an exact science and there’s no silver bullet for getting it right every time.
It takes time and commitment to develop a system and an instinct for uncovering those underrated stocks.
What’s your system for conducting fundamental analysis research?