Thursday, June 30, 2011

What is Fundamental Analysis?

 For most long term investors, fundamental analysis is the cornerstone of good stock selection. A careful study of factors other than the isolated share price can reveal much about a company's ability to grow and thrive even in difficult market conditions. But what is fundamental analysis?

Fundamental Analysis Definition

Fundamental analysis is the study of economic and company related factors that will influence share price. Technical analysis is the study of share price and volume being traded to determine the direction of the stock. Fundamental analysis broadly takes in pretty much everything else that could affect share price other chart patterns.
Fundamental analysis tries to place a valuated price tag on stocks in two broad ways: quantitative and qualitative.

Quantitative Analysis of Fundamentals

Quantitative analysis is the study of anything that has a number associated with it. Examples of quantitative numbers are:
  • How much money did the company make last year?
  • By much debt does the company have?
  • What is the ratio of profit made to cash on hand?

Qualitative Analysis of Fundamentals

Qualitative analysis is less tangible than quantitative. These are usually not clear cut numbers that can be plugged into a valuation formula. Instead the qualitative analysis might probe into such areas as:
  • How smart does the management team seem?
  • What proprietary technology does the company have?
  • Is the company straightforward and simple to run or are there many complex parts that can lead to efficiency problems?
  • Is the industry group a sustainable concept or just the flavor of the week?
Warren Buffet is perhaps one of the most widely recognized individuals that combines quantitative and qualitative analysis to invest in "wonderful" companies. Seeing as he was the richest man in the world in 2008 with a net worth of over 62 billion dollars at that time, fundamental analysis is definitely worth another look in both quantitative and qualitative fields.
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