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The fundamental analysis of stocks is the cornerstone of investing — and the foundation of most of the strategies covered in this tutorial. It involves evaluating a security using quantitative and qualitative factors to answer questions such as: Is the company actually making a profit?
Can the company beat its competitors in the future? Can the company repay its debts? After all, they reveal a lot about the current — and future — health of the company.
The financials are where investors find many of the quantitative factors used in fundamental analysis. Some key numbers to look for include net incomeprofit margindebt-to-equity ratio and the price-to-earnings ratio.
Although there are many different methods of finding the intrinsic value, the premise behind all the strategies is the same: In plain English, this means that a company is worth all of its future profits added together. For further reading, see Understanding the Time Value of Money.
The idea behind intrinsic value equaling future profits makes sense if you think about how a business provides value for its owner s. If you have a small business, its worth is the money you can take from the company year after year not the growth of the stock.
And you can take something out of the company only if you have something left over after you pay for supplies and salaries, reinvest in new equipment, and so on. A business is all about profits, plain old revenue minus expenses — the basis of intrinsic value.
Since a stock represents ownership in a company, this assumption applies to the stock market. But why, then, do stocks exhibit such volatile movements?
The fact is that many people do not view stocks as a representation of discounted cash flows, but as trading vehicles.
Who cares what the cash flows are if you can sell the stock to somebody else for more than what you paid for it? On the other hand, a trader would say that investors relying solely on fundamentals are leaving themselves at the mercy of the market instead of observing its trends and tendencies.
The Two Types of Investors This debate demonstrates the general difference between a technical and fundamental investor. A follower of technical analysis is guided not by value, but by the trends in the market often represented in charts.
So, which is better: The answer is neither.Master the basics of stock investing and learn how to invest in stocks with confidence before you buy a stock.
analysis to momentum trading and fundamental stock picking. strategies for. Benjamin Graham, the father of value investing, used these seven value stock criteria for selecting winning value stocks. Do you?
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