The definition of Fundamental Analysis
Fundamental analysis is a stock valuation method
that uses financial and economic analysis to predict the movement of stock
prices.
The fundamental information that is analyzed can include a company's financial
reports, and non-finanical information such as estimates of the growth of demand
for competing products, industry comparisons, and economy-wide changes.
Main Strategy
To a fundamentalist, the market price of a stock
tends to move towards its intrinsic value. If the intrinsic value of a stock is
above the current market price, the investor would purchase the stock, and if
the intrinsic value of a stock was below the market price, the investor would
sell the stock.
To start a fundamentalist makes an examination of the current and future overall
health of the economy as a whole. In this step you should attempt to determine
the direction and level of interest rates.
After you analyzed the overall economy then analyze firms individually. You
should analyze factors that give the firm a competitive advantage in its sector
such as management experience, history of performance, growth potential, low
cost producer, and etc.
Some expressions of Stock Fundamental Analysis
For beginning I describe some stock fundamental
analysis expressions that are more important:
#1- EPS: (Earnings Per Share)
The portion of a company's profit allocated to each outstanding share of common
stock. The amount is computed by dividing net earnings by the number of
outstanding shares of common stock. For example, a corporation that earned $10
million last year and has 10 million shares outstanding would report earnings
per share of $1.
#2- P/E Ratio: (Price/ EPS)
Also called its "earnings multiple", Price of a stock divided by its earnings
per share. The P/E ratio may either use the reported earnings from the latest
year or employ an analyst's forecast of next year's earnings. P/E gives
investors an idea of how much they are paying for a company's earning power.
An important notice here is that the P/E ratio is ultimately not an objective
measure; a high P/E ratio might show an overvalued stock, or it might reflect a
company with high potential for growth.
#3- Dividend
Dividend is an amount of the profits that a company pays to people who own
shares in the company. When a company earns a profit, some of this money is
typically reinvested in the business and called retained earnings, and some of
it can be paid to its shareholders as a dividend.
#4- Book Value
The book value of an asset or group of assets is sometimes the price at which
they were originally acquired ( historic cost ), in many cases equal to purchase
price.
#5- Growth Stocks
Growth Stocks in finance , are stocks that appreciate in value and yield a high
return on equity (ROE). Analysts compute ROE by taking the company's net income
and dividing it by the company's equity. To be classified as a growth stock,
analysts expect to see at least 15 percent ROE.
