Fundamental Analysis

Answer 1

In my last post I talked about technical analysis, that school of equity analysis that holds to using charts and graphs to ferret out patterns in market movements and take advantage of trading trends. On the opposite side of the debate on equity analysis strategy lies the fundamental analyst. While technical analysts relay heavily on charts and graphs of security prices, fundamental analysts relay on a in-depth look at the underlying company’s financial position. They try to gauge whether the firm is a healthy one or if it’s in for some dire straits based on its public financial accounting statements. Fundamental analysis is done by measuring all kinds of metrics that gauge the financial health and the performance of the underlying company, not the movement of the stock price of the security along a line in a graph. A fundamental analyst may look at a SWOT analysis performed for the firm. A SWOT analysis looks at internal and external factors that may affect the long-term performance for an individual firm. The letters stand for two internal factors, Strengths and Weaknesses of the firm; and two external factors, Opportunities and Threats. This is big-picture stuff that a firm’s strategic planning committee or senior leadership normally looks at. And speaking of leadership teams, fundamental analysts also take into account things like the past track record of key players in the firm’s C-Suite. But the metrics that fundamental analysts most often employ are typically represented by ratios derived from complex formulae. These metrics can include using the discounted dividend model to analyze the firm’s dividend payouts, looking at return on investment, return on equity, the price to earnings ratio, free cash flow of the firm, return on assets, price to book value, and the weighted average cost of capital. While there are die-hard adherents to both the fundamental and technical analysis camps, most investors benefit from some combination of the two differing methodologies. I think if you’re preparing to make an investment, the more analysis available to you, the more informed your decision can be. Learn about both approaches and do extensive research, not only on potential investments, but on your own research methods as well.

Answer 2

In my last post I talked about technical analysis, that school of equity analysis that holds to using charts and graphs to ferret out patterns in market movements and take advantage of trading trends. On the opposite side of the debate on equity analysis strategy lies the fundamental analyst.

While technical analysts relay heavily on charts and graphs of security prices, fundamental analysts relay on a in-depth look at the underlying company’s financial position. They try to gauge whether the firm is a healthy one or if it’s in for some dire straits based on its public financial accounting statements.

Fundamental analysis is done by measuring all kinds of metrics that gauge the financial health and the performance of the underlying company, not the movement of the stock price of the security along a line in a graph. A fundamental analyst may look at a SWOT analysis performed for the firm. A SWOT analysis looks at internal and external factors that may affect the long-term performance for an individual firm. The letters stand for two internal factors, Strengths and Weaknesses of the firm; and two external factors, Opportunities and Threats. This is big-picture stuff that a firm’s strategic planning committee or senior leadership normally looks at. And speaking of leadership teams, fundamental analysts also take into account things like the past track record of key players in the firm’s C-Suite.

But the metrics that fundamental analysts most often employ are typically represented by ratios derived from complex formulae. These metrics can include using the discounted dividend model to analyze the firm’s dividend payouts, looking at return on investment, return on equity, the price to earnings ratio, free cash flow of the firm, return on assets, price to book value, and the weighted average cost of capital.

While there are die-hard adherents to both the fundamental and technical analysis camps, most investors benefit from some combination of the two differing methodologies. I think if you’re preparing to make an investment, the more analysis available to you, the more informed your decision can be. Learn about both approaches and do extensive research, not only on potential investments, but on your own research methods as well.