When choosing stocks, many investors opt for the fundamental analysis method because it is relatively easy to use. So, what is fundamental analysis in stocks, how do you conduct fundamental analysis to select good stocks, and what are the advantages and disadvantages of this method? For detailed information on these, please see the information below.
Contents
- 1 What is Fundamental Analysis in stock trading?
- 1.1 Concept of fundamental analysis in stock trading
- 1.2 Important factors when conducting fundamental analysis in stock trading
- 1.3 How to conduct fundamental analysis in stock trading
- 1.4 The TOP-DOWN Fundamental Analysis Method
- 1.5 What are the pros and cons of fundamental analysis in securities?
- 1.6 Comparison between Fundamental and Technical Analysis
What is Fundamental Analysis in stock trading?
Concept of fundamental analysis in stock trading
Fundamental analysis in stock trading can also be understood as a method used to determine the intrinsic value of a business.
When conducting fundamental analysis, investors will pay attention to factors that can affect the stock’s value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors such as the company’s management effectiveness.
=> The ultimate goal is to arrive at a number that investors can compare with the current price of the stock to see whether the stock is undervalued or overpriced and then make an investment decision.
Important factors when conducting fundamental analysis in stock trading
When conducting fundamental analysis, investors will pay attention to important factors such as:
-
Business operations of the company: choose companies with good, stable business operations.
-
Company’s goals and missions: assess if the company’s future development direction has potential.
-
Profitability (current and estimated)
-
Demand for the company’s products and services
-
Competitive pressure and pricing policy
-
Business results over time
-
Business Results compared with similar companies and the market
-
Position in the industry: consider the position of the company compared to other companies in the same industry, avoid investing in stocks of companies with a very low position.
-
Quality of management is also an evaluation of the role of the company’s leaders. Avoid investing in companies with poor leadership.
How to conduct fundamental analysis in stock trading
When conducting fundamental analysis, investors need to examine a company’s financial reports and various stock market indicators to decide whether to buy or sell a stock.
- Revenue
- Profit
- Expenses
- Capital structure
- Cash flow…
Some of the ratios commonly used in fundamental analysis are: P/E, P/B, BVPS, EPS, PEG, ROS, ROE, ROA…
When considering these ratios, you should compare them with the industry average to determine whether the stock is overpriced or undervalued.
Other important data: evaluate the risks the company may face, observe the signs of which industries are attracting cash flow, and government policies (for example, the public investment sector benefiting from the government’s public investment capital disbursement policy)…
The TOP-DOWN Fundamental Analysis Method
There are 5 levels in the TOP – DOWN method to conduct fundamental analysis in securities, which are:
-
Analysis of macroeconomic conditions
-
Analysis of the financial – securities market
-
Analysis of the industry in which the company operates
-
Company analysis
-
Stock analysis
After completing the above steps, investors can filter out 5 types of stocks to choose from and allocate to their portfolio, which are:
-
Leading stocks (blue-chips): stocks of leading companies
-
Growth stocks (stable and explosive): stocks with stable or explosive growth.
-
Defensive stocks: stocks that do not fluctuate much during strong market volatility
-
Seasonal stocks: stocks that experience sudden growth in a short period
-
Cyclical stocks: stocks that tend to increase in price at certain times
What are the pros and cons of fundamental analysis in securities?
Comparison between Fundamental and Technical Analysis
Related post:
- The thinking and methods of stock investment must be understood
- 10 common Mistakes causing major losses for stock investors
Through this, we hope you understand what is fundamental analysis in securities and the methods used in fundamental analysis. If you have any questions, please leave a comment to be answered within 24 hours. We wish you success in your investment journey!
