Choosing a profitable financial security plays a very important role in investing. A wise choice could be your lead to success, so you should think carefully before making a final decision. However, the market is very unpredictable. A stock with a steady positive trend can do a reversal in a minute. That is why it is not advisable to trust your gut instincts to invest in an obvious winning stock. Investing is not as simple as that. Investors use different methods in order to recognize profitable securities despite the market’s volatility. Recently, we have talked about technical analysis. In this article, we are going to talk about another method which is called fundamental analysis.
What is fundamental analysis?
Fundamental analysis refers to the method of evaluating a security to find its real value by examining the factors that affect its economy, industry groups, and the company it belongs. In other words, it is done to identify if a stock is going to be profitable or not based on its overall performance.
Why should you use fundamental analysis?
In technical analysis, investors believe that a security’s price already reflects its true value. However, in fundamental analysis, investors believe that you need to understand first everything about the stock before you can determine its correct price.
Fundamental analysts believe that there are times that the stock market undervalues a company from time to time. Investors take advantage of this by identifying underpriced stocks. Once they find a company that is currently undervalued, they invest in its stocks, and then wait for the market to realize its mistake and correct the stock’s price.
How does it work?
There are 2 approaches in fundamental analysis. One is the bottom up analysis. In this type of approach, a fundamental analyst start by studying a certain stock or company, working his way towards the whole industry, then to the whole economy. The other one is its complete reverse, which is called the top down analysis.
In fundamental analysis, there are a lot of factors to consider. For example, in studying the real value of a company, an analyst should consider the company’s business plan, management, financial history, and its current performance. The list is endless. Fundamental analysis actually takes into consideration everything that has a connection to the company’s profitability. All of these are studied to evaluate if the company’s stocks have a chance to make an uptrend in the future.
Again, just like in technical analysis, finding a company with good records does not guarantee that it will become profitable. It merely narrows on the securities that have a good chance of making profits. Just remember that whenever you want to invest in a certain company, it is essential to understand its performance, its market, and the industry it operates. You should not blindly invest in any company. Knowledge is still the best way to defeat the market.
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