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How Traders Should Carry Out Fundamental Analysis on Stocks – Guide for 2024

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Table of Contents

What is Fundamental analysis?

Fundamental analysis – What are the Most Important Basic Factors?

Types of Fundamental analysis

How is Fundamental analysis of a Stock Done?

How Does Fundamental analysis differ from Technical Analysis?


Are you a trader who is interested to start with investing in the stock market but feeling confused about this unexplored territory? Before you make investments in the stock market, it is necessary to carry out fundamental analysis on stocks, and our handy guide for 2024 will help you in this regard. With proper fundamental analysis, it can be easier for you to safeguard your investments and get the financial success that you deserve.

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What is Fundamental Analysis?

Fundamental analysis is actually a process of looking at the financial performance of a company both past and present performance in order to get insights into the value of the real price of the company stocks. With this technique, it can be useful to analyze the stability of the company, how it is making money etc.

Know about: Penny Stocks Prices 2024: Top Factors Affecting Prices of Penny Stocks.

Various types of data are necessary for conducting fundamental analysis. These include:

Historical Data

It helps determine how the company used to operate in the past.

Publicly Available Information

This is information from the company made available in the public domain, such as its earning reports, annual reports, management announcements etc.

Publicly Unavailable information

This refers to information that is not identified in the public but is important, such as the way the company leadership manages various situations, handles crises and more.

During fundamental analysis of a stock, it is important to look at the different factors that can have an impact on stock prices, such as:

  • How the industry performs that the company is a part of
  • Impact of politics on the geographical region of the company
  • External politics and trade agreements having relevance
  • The financial statements and records of the company
  • Media releases on the operations of the company and its various events, acquisitions, mergers etc.
  • Press releases from the company
  • Analysis of the competitors of the company in its industry domain

If the fundamental indicators of a company exhibit a negative impact there will be most probably a drop in the stock prices. However, if the data is found to be positive, such as in case of a robust earnings report, the share price of the company can improve as a result.

Fundamental analysis – What are the Most Important Basic Factors?

Before carrying out a stock fundamental analysis, it is necessary to study some basic factors, which include:

  • Rate of turnover
  • Corporate governance
  • Debt
  • Growth in revenues over the years
  • Profits earned over the years
  • Revenue and structure

With the help of fundamental analysis, it can be easier to understand whether a trader is selling or buying and undervalued or overvalued stock.

Long-term stock market trends can be predicted with the help of fundamental analysis. It can help traders with making long-term investments.

Types of Fundamental analysis

Fundamental analysis can be categorized into two main types:

Qualitative Analysis

With this method, the brand value of a company is evaluated. It is determined how decisions are taken by the management and the financial performance of the company over a period is analyzed.

Quantitative Analysis

It is involved with the figures and statistics. This type of analysis focuses on the financial statements of a company in order to determine its real stock prices.

Although there are differences in these methods, both of these are essential in order to have a proper understanding about the true share price of a company.

There are also two approaches involved in Fundamental analysis, which include:

Top-Down Approach

It involves taking a look at the larger economic picture and then zeroing in on a particular company.

Bottom-Up Approach

This is an approach contrary to the top down method. In this case, the company is studied first and then it is considered how it might get affected by the larger economic factors.

How is Fundamental analysis of a Stock Done?

These are the steps to follow in order to do a fundamental analysis of a stock:

  • First and foremost, you have to know about the company in a proper way, its functions, how it functions and its style of business.
  • Next, you have to look at the quarterly or annual financial reports of the company in order to do a mental analysis of the same.
  • You have to use financial ratios in order to form an initial idea.
  • Next, it is important to find out about the competitors of the company and get a proper idea about them.
  • You should also check the amount of debt of the company in the market and compare it to the debt of its competitors.
  • Finally, you have to make an analysis of the future potential of the company.

How Does Fundamental analysis differ from Technical Analysis?

Fundamental analysis is involved with the financial health management economic factors having an effect on its performance trends in the industry etc. Technical analysis is about analyzing trading volume, historical price movements and chart patterns for predicting price movements in the future.

There is a long-term perspective of fundamental analysis, which aims to access the intrinsic value of a stock and its growth potential over an extended duration. However, the perspective of technical analysis is for short to medium-term. It is focused on market sentiment and short-term price fluctuations.

Fundamental analysis helps to determine whether a stock is overvalued or undervalued on the basis of industry outlook and its fundamental metrics. Technical analysis, however, is involved with identifying buy/sell signals on the basis of trends and patterns in the price movement of the stock, without taking company details in consideration.

Fundamental analysis makes use of various tools such as earnings reports economic indicators and financial statements. In contrast, technical analysis uses support/resistance levels, trendlines, charts etc for predicting future price movements.

Also read: Volume in Stock Market – Top Things Investors Should Know About.

Fundamental analysis is perfect for long-term investors who believe in the growth prospects and fundamentals of the company. Technical analysis is perfect for traders who intend to make the most of short-term price movements, often ignoring the fundamentals of the company.

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As you can understand, a sound fundamental analysis that considers all the key indicators can be useful for keeping your investments safe and ensuring your financial success in the long run.

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