Fundamental Analysis For Beginners 2021 [Free Guide]
Fundamental analysis is used to rank companies based on hard facts. Fundamental analysis plays a very important role in value investing, since every investment in value investing should be derived through fundamental analysis. Fundamental analysis is based on the assumption that a company has an intrinsic value.
An intrinsic value is determined among other things by a fundamental analysis and thus sets a potential purchase price for the value investor. But a fundamental analysis not only determines the intrinsic value, it also makes a statement about the quality of the company and the industry.
This article is intended as an overview of fundamental analysis. The individual points are described in more detail in separate articles.
Fundamental analysis definition
Wikipedia defines fundamental analysis thus: Fundamental analysis seeks to determine the fair or reasonable price of securities (“intrinsic value”). In contrast to chart analysis it is not based on a consideration of stock market prices or past chart patterns, but on business data and the economic environment of a company, the so-called fundamental data.
What constitutes fundamental analysis?
Again and again people ask what constitutes fundamental analysis? There is no simple answer to that. Every investor has to decide for himself how much effort he wants to make in fundamental analysis and what he considers especially important. But these three categories may be taken into account in a fundamental analysis:
Global analysis is used in fundamental analysis to provide an estimate of what the business environment for a business looks like. For a global analysis a variety of issues are taken into account. For example it should be asked whether the company is influenced by economic developments.
Global monetary policy also plays a role in global analysis. The more money circulated by the central banks, the stronger the influence of the central banks on the world economy. Furthermore, interest rates and the rate of inflation for companies play a role in fundamental analysis.
In addition, exchange rate effects and specific developments in different countries play a role in the global analysis. For example it could be seen how a change in the American presidency has affected different countries and sectors. Political changes are therefore crucial for global analysis.
Another factor in a global analysis may be commodity prices. The development of oil prices, for example, have a considerable impact on how companies are doing in this industry. Global developments can significantly influence commodity prices. This point has to be examined in a global analysis.
How to conduct a global analysis?
For example, a so-called SWOT analysis can be created for every stock analysis. This SWOT analysis also takes into account global developments.
The core of value investing is risk management. Only those who know their risks can reduce them and thus create a measure of security. Therefore, fundamental analysis is an important part of the puzzle in value investing.
In addition to the overall situation that is covered by the global analysis, the specific industry environment is very important, and to this effect, an industry analysis can be created. This considers the entire industry and the overall conditions and developments that apply.
Many sectors are characterized by a particularly high dependence on the economy or commodity prices. The goal of an industry analysis is to identify these dependencies in order to be able to identify potential risks as well as opportunities.
For example, cyclical companies are hit particularly hard during periods of economic downturn. This situation can be seen as a great opportunity when the economy recovers after crises.
The impact of regulations can also be a factor in industry analysis. Certain industries, for example, are extremely heavily regulated. This results in many opportunities but also in some risks.
The industry analysis should also aim to give an insight into the evolution of the industry as a whole.
How to handle the industry analysis?
SWOT analysis can be applied for the industry analysis, too. In addition to the global factors, the sector and company specific features are highlighted.
In addition, one might also make a so-called peer group comparison. In such a comparison one takes a look at the competitors and decides which companies have a particularly good or bad standing.
The company analysis is the very core of our fundamental analysis. In company analysis we focus on the company itself.
If a company performs well in your company analysis, you should do the industry analysis and the global analysis before making an actual purchase. Fundamental analysis is therefore a structured tool.
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Conclusion fundamental analysis
Fundamental analysis is the core of value investing. As value investors we want to know exactly where the opportunities and risks lie with a company. To this end we can use fundamental analysis to create a basis that supports our decision.
Here it is important that we refer to a uniform standard so that we can discern and take into account quality differences.
A fundamental analysis should therefore always take into account:
- “How high is the quality is the company?”
- “Which price would be appropriate?”
Trading High Dividend Stocks: 3 Things To Keep In Mind
Crucial factors for your success
Nobody can foresee a share‘s performance, not even Warren Buffet or André Kostolany. But what you can do to increase your chances of success on the stock market is to observe and understand the development of a market. This way you‘ll find out which market is interesting, what trade ideas are the best and when it’s worth getting started. Learn all about the three factors crucial for your success with stocks!
An investment in the future
An investment in shares is an investment in the future, but not only in your own. Because in buying shares, you obviously trust in and hope for better times. As a result, the development on the stock market anticipates reality by six to twelve months. Of course, this has to be confirmed by real facts for the price to remain stable and your investment being a success.
The importance of the economy
Major hopes rest on the economic climate. The economic climate provides information about the economic situation and reflects the upswing or downswing of a country. If things are going well for the economy, they go well on the stock market. However, if the economy is doing too well, a collapse is looming, thus threatening stock prices. On the other hand, some ups and downs are quite natural. After each high performance phase there is often a short-term but pronounced price slump. As a rule, things go even better after such a slump, like after the financial crisis of 2008
The Gross Domestic Product (GDP)
When it comes to the economic development of a country, what usually comes to mind is the gross domestic product, or GDP for short. But on the stock market nobody really cares about the GDP – since it refers to the past, not to the future.
Much more interesting are certain leading indicators. How do I know if a market economy will continue to develop well during next year so that I can invest with reassurance, and sleep soundly at night?
Worldwide, so-called mood surveys are conducted regularly at companies and consumers alike. That is, company managers are asked if they have a positive or negative outlook into the future. This is a good indication as they have their own situation as well as those of their competitors, suppliers and customers in mind.
Consumers of course need to consume, so they buy. And if they do not do that because they are worried about their job, if their partner has been terminated, or if their salary has not been increased for ages, that‘s bad for the economy as a whole.
An important factor are incoming orders. Rising order numbers historically indicate rising stock market prices. Because what is ordered today must be produced by tomorrow at the latest. This applies especially to long-lived goods, such as wind turbines or cargo ships. For some orders the production may take years to complete!
The unemployment rate
The unemployment rate is actually a laggard among economic indicators, because the number of newly created jobs increases only after an upswing has already gathered pace, and the number of unemployed decreases. The companies have received their orders and now they need enough staff to build the ordered wind turbines or cargo ships.
Currently we have an incredibly low unemployment rate, with the number of unemployed still in decline. As the number of unemployed continues to decline, many stockbrokers fear that companies’ capacities are exhausted, meaning ultimately that they cannot accept more orders. With the first interest rate hikes at least there are the first skeptical remarks on the expected further course of the stock market.
If you receive a higher salary, you spend more money. If you have a new and better paid job, you spend more money. Money that you could save and invest in stocks. But actually it’s a good thing if at least part of the population lives like this, since consumption improves the profitability of companies and stock prices continue to rise.
Especially during the run up to Christmas one comes across the impression – both on television and in the newspapers – that people spend more readily than the year before.
If the economy is doing well, the unemployment rate continues to fall and share prices continue to rise due to consumer behavior, high-dividend stocks offer a profitable additional return opportunity.
The best way to build a dividend portfolio is to start small. Above all else, diversity is an essential factor in investment, and that goes for dividend stocks as well. Thus, the easiest way to achieve a certain variety is to invest in funds, especially if you do not have a lot of money.
First, find out how much you can invest in your dividend portfolio every month. Then look for a fund that regularly pays out dividends, and invest your capital there. Some online brokers offer you so-called savings plans or other tools to help you come up with a plan to invest in dividend funds.
Personalized selection of individual shares
When investing in individual stocks, diversification is one of the most important aspects, because investing in individual securities carries enormous risks. This means one has to analyze precisely and in advance which stock of which company really suits the individual requirements.
Here, stock screeners can provide valuable assistance. Anyone looking for profitable individual titles can search for these criteria using a stock screener, with a search input like “show all stocks offering a minimum dividend yield of 5%”.
Further key figures such as return on sales, company size and earnings per share can be used to make targeted investments.
All things considered this is a form of investment where prudent, well-informed users stand to make reasonable profits, as long as they keep in mind the above mentioned factors.
The role of Trade Ideas Pro
Scanning the market for high dividend stocks can be time consuming, Trade Ideas is one of the stock screeners available, that can help you with that task. As an alternative, you can use tools like Yahoo Finance and Google Finance.