In order to begin investing, it is vital to be familiar with the concept of fundamental analysis. Regardless of what investing strategy you choose to follow, fundamental analysis is at the center of likely all of them.
In a nutshell, the value of fundamental analysis lies in the fact that it provides the “true value” of the security, allowing the investor to understand if the asset is under or overpriced, thereby providing valuable information on the next steps to take. The true value is what is known in the world of finance as the “intrinsic value”.
The basic assumption in fundamental analysis is that the market values the asset incorrectly, hence allowing the investor to take advantage of the discrepancy.
Furthermore, fundamental analysis provides information and answers questions on the trajectory of a company’s revenues and profits, its position in its industry’s competitive landscape, the debt on the company as well as a glimpse into the company’s financial practices. These answers can be inferred from inspection of financial statements (cash flow statement, income statements, balance sheets, 10-K/10-Q etc.) and historical data.
While looking at data and numbers can provide a quantitative approach to fundamental analysis, it is also possible to conduct a qualitative analysis. This is done by examining a company’s business model, competitive advantage, management, and corporate governance.
