Fundamental Analysis StrategyA fundamental analysis strategy involves studying a company’s key figures, its past history, its future prospects, and its competition.It’s all about doing your homework before buying a stock and then monitoring the stock after you buy it. If you intend on owning shares in a company for a length of time you need to know that the company is built on solid foundations, that it has a consistent flow of cash into the business, and the people running the show are making sensible decisions. Let’s consider fundamental analysis strategy . . . Why fundamental analysis worksCompany profits drive stock prices. With fundamental analysis we recognize that a "stock" is simply a representation of ownership in a company. The company is the cause of the stock price movement. And the stock price movement is the effect of changes within the company.How fundamental analysis worksFirstly, we need to know what fundamental factors have the strongest correlating effect on a company’s performance (i.e. profitability). This will differ from one company to the next depending on the size of the company and the industry it operates in. But generally speaking, we concentrate on the factors affecting a company’s profitability and factors relating to the company’s financial strength.Once we know what to look for we can perform a search of all stocks in the market to see which stocks meet our criteria. The tool we use for this purpose is the stock screener (see Using a Stock Screener for details). Our stock screening returns a list of companies that match our screening criteria. Then we can perform in-depth analysis on the candidates displaying the best potential (see the Stock Market Tutorial for more details) Note: stock screening isn’t the only way to find good stocks, but it is quick and efficient. Tactics of fundamental analysisWith a fundamental analysis strategy we’re looking for a good company with a history of making money. We also want to see that its debts and obligations are under control.Substantial upside potential needs to be recognized and economic conditions need to support the particular company in question. For instance, in times of high interest rates, certain types of companies perform better than others. And that also goes for changes in a country’s monetary exchange rate (importers and exporters come to mind). We act as if you’re buying the whole company not just a few stocks. Examining from all angles and weighing up the pros and cons. I find it useful when looking at a company’s past history to look for times when the company was extremely profitable. I consider:
Evaluate future prospects. Build a case for and against the company. Then decide which argument is stronger. Advantages of fundamental analysisA fundamental analysis strategy allows you to sleep at night. You can be confident knowing that you’ve completed your due diligence. You’ve analyzed the company from differing perspectives. You’ve used both logic and intuition to make your buy decision (buy, sell, or hold).Anyone who has completed the Stock Market Tutorial here at Stock Market College will know that I combine fundamental analysis with some technical analysis to boost my returns. Fundamental analysis on its own is effective, but when combined with stock chart analysis, you increase your chances of success. I find it useful to look at a company’s stock price trends together with the fundamental analysis trends. This gives you an idea of what factors have affected stock price increases in the past. Disadvantages of fundamental analysisI don’t believe that a fundamental analysis strategy itself has any inherent disadvantages, but there are some things that investors need to be aware of when performing this analysis.Be conscious of:
Who uses fundamental analysis as a strategy?
Stock market strategies: Fundamental Analysis – the company’s financial numbers and its story Technical analysis – examining stock charts and technical indicators Value Investing – buying good companies at the right time Growth investing – buying companies that are growing fast Income investing – buying companies for their dividends Index investing – buying into a stock market index fund Return from Fundamental Analysis Strategy to Stock Market Strategies |