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Fundamental Analysis

Fundamental analysis maintains that markets may misprice securities in the short term, but their correct price will eventually be reached. It involves analyzing a company's economic, industry, and financial factors to determine the company's intrinsic value, which is compared to the current market price to determine if the security is underpriced. Technical analysis, on the other hand, believes that all relevant information is reflected in a security's current price and studies past price patterns and trends to predict future movement. Fundamental analysis uses either a top-down or bottom-up approach, starting at either the macroeconomic level and moving to specific industries and companies, or starting with individual companies and working up.

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Waqar Abdullah
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253 views3 pages

Fundamental Analysis

Fundamental analysis maintains that markets may misprice securities in the short term, but their correct price will eventually be reached. It involves analyzing a company's economic, industry, and financial factors to determine the company's intrinsic value, which is compared to the current market price to determine if the security is underpriced. Technical analysis, on the other hand, believes that all relevant information is reflected in a security's current price and studies past price patterns and trends to predict future movement. Fundamental analysis uses either a top-down or bottom-up approach, starting at either the macroeconomic level and moving to specific industries and companies, or starting with individual companies and working up.

Uploaded by

Waqar Abdullah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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FUNDAMENTAL ANALYSIS

1.
When the objective of the analysis is to determine what stock to buy and at what
price, there are two basic methodologies investors rely upon:
a. Fundamental analysis maintains that markets may misprice a security in the
short run but that the "correct" price will eventually be reached. Profits can be
made by purchasing the mispriced security and then waiting for the market to
recognize its "mistake" and reprice the security.
b. Technical analysis maintains that all information is reflected already in the
price of a security. Technical analysts analyze trends and believe that
sentiment changes predate and predict trend changes. Investors' emotional
responses to price movements lead to recognizable price chart patterns.
Technical analysts also analyze historical trends to predict future price
movement.[3]
2.
The choice of stock analysis is determined by the investor's belief in the different
paradigms for "how the stock market works". See the discussions at efficient-market
hypothesis,random walk hypothesis, capital asset pricing model, Fed model Theory of
Equity Valuation, market-based valuation, and behavioral finance for explanations of
these paradigms.
3.
The intrinsic value of the shares is determined based upon these three u/m
analyses. This value is considered the true value of the share. If the intrinsic value is
higher than the market price, it is recommended to buy the share. If it is equal to market
price, it is recommended to hold the share; if it is less than the market price, then one
should sell the shares.
4.

Fundamental analysis includes


a. Economic analysis
b. Industry analysis
c. Company analysis

5.
Investors using fundamental analysis can use either a top-down or bottom-up
approach.

6.

a. The top-down investor starts their analysis with global economics, including
both international and national economic indicators; such as GDP growth
rates, inflation, interest rates, exchange rates, productivity, and energy prices.
They subsequently narrow their search to regional/industry analysis of total
sales, price levels, the effects of competing products, foreign competition, and
entry or exit from the industry. Only then do they refine their search to the
best business in the area being studied.
b. The bottom-up investor starts with specific businesses, regardless of their
industry/region, and proceeds in reverse of the top-down approach.
Procedure .
The analysis of a business' health starts with a financial statement

analysis that includes financial ratios. It looks at dividends paid, operating cash flow, new equity
issues, and capital financing. The earnings estimates and growth rate projections published widely
by Thomson Reuters and others can be considered either 'fundamental' (they are facts) or 'technical'
(they are investor sentiment) based on your perception of their validity.
a.

The amount of debt a company possesses is also a major consideration in


determining its health. It can be quickly assessed using the debt-to-equity ratio and
the current ratio(current assets/current liabilities).

b.

discounted cash flow

(1)

dividends received by the investor, along with the eventual sale price;
(Gordon model)

(2)

earnings of the company;

(3)

or cash flows of the company.

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