Are you interested in putting your money to use by investing in stocks? It sure is a lucrative method to buy stocks of promising companies, and rest assured that it will bring you some returns. But before you get your hard-earned money to go out, it is essential to have a good knowledge of the stock market.
You can learn the stock market by joining a good Stock Market Institute because these coaching institutes have faculty members who will guide you to become an intelligent trader.
This article will help you figure out how to do primary screening of companies and stocks. Then, you can say that you have taken a “calculated risk”. Let’s first get the idea of Fundamental Analysis?
What is Fundamental Analysis
2 types of analyzing techniques come into the picture while studying the market – Technical and Fundamental. In Fundamental Analysis, we screen the company from a broader perspective. Fundamental analysts can give us a clear picture of the valuation of a company in comparison to various factors in the market. Now, let’s see How to do Fundamental Analysis of Stock.
Tips on How to do Fundamental Analysis of Stock
Check for the Company’s Portfolio
When you buy a pair of shoes, you check for their durability, material, comfort, and in the end, the value for money. Why not do a similar screening when putting such a big amount in stocks? A company’s portfolio is the best tool, and it will give you a basic briefing on what the company does and show you in detail its future goals.
Let’s say we have a manufacturing company that you want to put your money in. You will first need to know what product we manufacture. Where are those products used in the market? What type of clientele is the company serving? Moreover, where do we see ourselves a few years down the line as manufacturers? How are they trying to optimize their efficiency? All these basic things will help know the company. You can easily get this information in the ‘about’ section of a company’s page. As you can find, the company also releases its financial statement. From here, you can find out how the company has been performing in the past and its goals towards its investors.
Understanding the Financial Statement
How would you judge a company’s well-being or its future endeavours? Simple – you have their financial statements. Every listed company will release its financial statements for the fiscal year, and the income statement will show how the company spends its money. This is important since, in the future, you should be aware of where your money is travelling if you put in money for this company’s shares. A balance sheet will give you the number of assets the company has and give you an idea of the liabilities. The most important parameter is the capital or shareholder’s equity. This is the money an investor would get if the company decides to clear off all the liabilities and sell off all its assets.
Check for Warning Signs
Warning signs are some check marks you should be aware of so that you don’t dive into this pool without a safety measure. Every company will have its ups and downs, although being aware of these things will help you make precise decisions. Now, what are these warning signs? A company with an invariant revenue graph is a go green signal. Now take, for example, company A which has a massive profit in the 1st quarter and then it drops down with more than 50% (although it is still a profitable business). We cannot call this consistent revenue growth.
On the contrary, company B has a consistent growth of 50%, 60%, 70%, etc. The graph you now see is linear. Here, in this case, company A is a red flag. Check for the company’s debts and how the board of members deals with these liabilities. Everyone running a business has to borrow some money, and at what rate they clear off the debts shows the worth.
Learning The Market
It is essential to know what the overall market scenario is. Let’s say you are preparing for an exam. You first judge the syllabus, what type of questions the examiner asks, what others are preparing, etc. This is the same strategy. Before investing in stocks of a particular company, you need to study how that company is performing with respect to the market outside. For instance, let’s consider investing in a food and beverage company. Where that company stands with respect to its competitors gives you an edge over its strengths. Some companies take a step further on thinking about the environment and action certain projects towards it. These things make a great impact on its stock valuation.
All these factors combined, such as a basic study of the company’s financial performance, its overall standing in the market, etc., will help you do a fundamental analysis of the stocks. The Thought Tree gives you extensive insights into these fundamental analysis techniques. The coursework will guide you in the correct direction of analyzing the stock market. I hope this article helped you to understand How to do Fundamental Analysis of Stock.