fundamental analysis of stocks
What Is Fundamental Analysis?
Every one who is related to stock market must have come a crossed with is word Fundamental Analysis. On on funny note one can say it Funds which makes you mental. Fund-a-mental. Their are some other ways also like technical analysis of stock, but fundamental analysis is considered to be comprehensive one. Many investors use this strategy to earn money from stock market. such as going long or going short on a stock. Let is find out how fundamental analysis is useful for traders.
Helps finding the right value.
Usually the stock prices which we see it in stock exchanges like national stock exchange are not the real value as its due to demand and supply and some times its due to speculation. So now you must be be thinking "how to find the right price?" Now its time to take fundamental analysis of stocks in it. It helps you to find how and company is performing by looking at its income statements. It is a process of evaluating any stock or a company that will effect the future performance of share.
Apart from looking only financial statements this method also looks at industry performance, country economic outlook, and number of competitors in market. You can call this method is the foundation of solid and good investing.
Any company who has a strong fundamentals will defiantly performs better in stock market and price will move UP and sometimes we have seen that the company who has better fundamental have higher price in stock market , from what fundamentals have calculated. Its due to high in demand, and stock market is a game of demand and supply only.
On the other hand weak fundamental company share are more on down side. because of weak financial earning and not performing good from its competitors.
Key factors to perform Fundamental Analysis.
This is the first step that every investors to look for and that is , Is company is making profit or not. If yes then how much profit is a company is making. Earning are the main factor to find the future price of its share trading in stock exchanges. Factors that effects earning are assets, liability , sales, cost of a product. In technical terms this method is called EPS (earnings per share).
2. Profit Margin
A profits margin tell you that how much a company keep in earning out of every rupee of the revenues. This is useful comparing competitors under same categories. Higher profit margin indicates that the company has good control over its cost among its competitors.
3. Return On Equity (ROE)
ROE shows that how good a company use investment funds to generate growth. ROE is useful for comparing the profitability of companies within a sector or industry. Investors are interested in those company's that have high and increasing ROE, because that means company has been successful in using shareholders money to invest in growth projects that gives high returns.
Return On equity = Net Income/Avg. shareholders equity (or net worth).
4. Price to earning (P/E)
This PE is the on thing that investors looking for. Investors looks at this PE Number as if it tells you everything about company. But its actually not. (if it did then their is no point looking at other numbers). In short High PE indicates that stock market has high hope in the stock so investors bid higher in exchanges on the other hand low PE indicates "vote of no confidence" investors have no faith in future earnings. So you might be thinking, what is the right P/E honestly their no right answer for this question.
P/E = Stock Price / EPS
5. Price to book (P/B)
P/B is an investment valuation used by investors to compare market value of a
company's share to its
book value. It also indicates estimated value of a company.
P/B Value = Stock price per share / Shareholders equity per share