What Is Fundamental Analysis
Chapter 4: What is Fundamental Analysis?
You can use fundamental analysis to assess a particular asset for its intrinsic value. In fundamental analysis, you examine qualitative and quantitative factors that affects the asset’s value. You study the industry conditions and the general economy. Also, you take note of the company management, and the company’s financial conditions. Fundamental analysis can help you determine the undervalued and overvalued stocks.
In fundamental analysis, you want to find out the performance and health of the company. You do this by considering important indicators. You try to identify industries or companies that are strong. You invest in a strong company for the long term.
Fundamental analysis takes advantage of
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You need to compare these earnings with some market value. You can use the price-earnings ratio (P/E ratio) to compare the earnings to the stock price. If the P/E ratio is high, the stock is more likely overvalued. To determine if the P/E ratio of a company is high, you compare it with the other companies' P/E ratios. But, the companies must belong in the same industry.
What are Undervalued Stocks?
An undervalued stock is a stock that trades below its intrinsic value. You can determine an undervalued stock. You assess the stock's price/prospective earnings, price/sales, dividend yield, price/book, and price/cash flows earnings. But, you can only determine it if you can estimate the future interest rates and the company’s future profits. The stock of a bankrupt company is not an undervalued stock. Because of the Internet, you will find it easy and fast to gather information about a company’s stock.
An undervalued stock has a price that is at least 33% below its intrinsic value. You need to compute the stock’s price-earnings ratio. This ratio must be in single digits and as low as possible. For example, a stock is trading at 50 pesos and has 2 pesos earnings per share. So, the price-earnings ratio is 25. This P/E ratio is high. As such, you do not invest in
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As a stock trader, you rely on trading tools to assess stocks. You analyze statistics from trading activities. You do so to forecast the future movement of a particular stock. You focus on analytical tools and charts to assess its strength or weakness. You try to determine the future price movement of a stock.
As a technical analyst, you focus on historical price changes and trading activity. You determine future price movements through them. In technical analysis, the stock price includes all available information. As such, it is the real fair value of the stock. Also, technical analysis assumes that the market trends over the short-term and long-term. As such, stock traders can earn more money by taking advantage of the existing trend.
In simple terms, technical analysis studies the supply and demand factors . It monitors the price, open interest, and trading volume changes. Analysts have developed different technical indicators to estimate the future price movements of stocks. They use these indicators on charts of different timeframes.
What are Stock Charts?
You use stock charts to create trading strategies. Because of technological advances, you are able to use them to make wise decisions. One chart can provide a wealth of information. It can show how buyers and sellers
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