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If you are interested in Stock Market, perhaps you have heard about Fundamental Analysis. It is the first and foremost basic for rational investment. If you really want to understand stocks before investing, you must do care about fundamental analysis.

Stock investment is so broad; it’s tough to know where to start.

Bad News- there is endless number of investment strategies that are very different from each other

Good News- almost all use the fundamentals.

When talking about stocks, fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company’s actual business and its future prospects.

Fundamental analysis serves to answer questions, such as:

• Is the company’s revenue growing?
• Is it actually making a profit?
• Is it in a strong-enough position to beat out its competitors in the future?
• Is it able to repay its debts?
• Is management capable enough for further improvements? Etc.

Fundamental Analysis using Qualitative and Quantitative factors

The various fundamental factors can be grouped into two categories: quantitative and qualitative.

A. Fundamental Analysis: Qualitative Factors – The Company

1)      Business Model: Even before an investor looks at a company’s financial statements or does any research, one of the most important questions that should be asked is: What exactly does the company do? This is referred to as a company’s business model.

2)      Competitive Advantage: A company’s long-term success is driven largely by its ability to maintain a competitive advantage – and keep it.

3)      Management: It is the most important aspect for investing in a company. It makes sense – even the best business model is doomed if the leaders of the company fail to properly execute the plan.

4)      Corporate Governance: Corporate governance describes the policies in place within an organization denoting the relationships and responsibilities between management, directors and stakeholders.

B. Fundamental Analysis: Qualitative Factors – The Industry

1)      Customers: Some companies serve only a handful of customers, while others serve millions. In general, it’s a red flag (a negative) if a business relies on a small number of customers for a large portion of its sales because the loss of each customer could dramatically affect revenues.

2)      Market Share: Understanding a company’s present market share can tell volumes about the company’s business. The fact that a company possesses an 85% market share tells you that it is the largest player in its market by far.

3)      Industry Growth: One way of examining a company’s growth potential is to first examine whether the amount of customers in the overall market will grow. This is crucial because without new customers, a company has to steal market share in order to grow.

4)      Competition: Simply looking at the number of competitors goes a long way in understanding the competitive landscape for a company. Industries that have limited barriers to entry and a large number of competing firms create a difficult operating environment for firms.

5)      Regulation: Certain industries are heavily regulated due to the importance or severity of the industry’s products and/or services. As important as some of these regulations are to the public, they can drastically affect the attractiveness of a company for investment purposes.

Watch out my next blog- Fundamental Analysis of Stocks: Quantitative Factors