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Fundamental Analysis of Stocks

HomeFundamental Analysis of Stocks

What is an Investment?

Fundamental Analysis

“An investment operation in one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative”.

–  Graham & Dodd (Security Analysis 1st Edition 1934)

“The standing of an enterprise is in part a matter of FACTS and in part a matter of OPINION.

What is Fundamental Analysis?

A more academic definition of a top down approach to Fundamental Analysis would read something like this:

Fundamental analysis involves a study of the overall financial health of the economy and industry and an examination of business’s financial statements, management quality, its competitive advantages and future prospects.

Try to understand the statement at the beginning of this page in light of this academic definition. The key to fundamental analysis is in-depth RESEARH of both quantitative and qualitative factors.

Quantitative research is an analysis of FACTS such as financial data published by the company and statistical data pertaining to the economy and various industry sectors operating therein. Qualitative research is a much larger subject. It deals with matters such as nature of the business, character of the management and involves an analysis based on miscellaneous sources of information like management interviews, on site visits to assess the quality of products and workings of employees, advertisement initiatives, …… The list could be endless.

In order to estimate the potential for future growth, we study both, qualitative and quantitative factors and form an OPINION.

Some contemporary OPINION’S become FACTS in future. When we form an opinion we all hope it will become a fact, which is why we invest based on our OPINION (we hope most of you do, unless there is another reason to invest). Why do some people achieve a higher degree of success when it comes to OPINIONS?

At this point, I could go on and on about the importance of RESEARCH and tell you how should do it. Let me assure you, you know both, its importance and methodology. So as you reason the future, and as you begin to analyse business environments, the competitiveness of a company’s products, its future plans, the conviction and sincerity of the management and before you form an OPINION, just believe in this:

“You are neither right or wrong because the crowd disagrees with you….you are right because your data and reasoning is right”

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About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.