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fundamental analysis of securities

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introduction on fundamental analysis of securities


With sharp turnarounds in the stock market, the investor is puzzled with picking up the right stock to be held in portfolios. For analyzing and selection of the right stock, investors have following two approaches: Fundamental Analysis and Technical Analysis. Fundamental Analysis is the study of the underlying data that affect a corporation. Technical Analysis, on the other hand, is the study of a stock’s price.

Traditionally, fundamental analysis has occupied the majority of resources devoted to the analysis of stocks. In this section an introduction to fundamental analysis is considered for discussion.
Fundamental Analysis: Introduction
Fundamental analysis is a technique that attempts to establish a stock’s value by considering on underlying factors that affect a company's actual business and its future prospects. On a broader scope, fundamental analysis can be performed on industries or the economy as a whole. The term simply refers to the study of a stock’s value while using basic data such as earnings, sales, risk and so forth.
These underlying factors are broadly classified into two categories:
Quantitative: These fundamentals are numeric, measurable characteristics about the business. The biggest source of these quantitative data is the financial statements of the company, i.e., Statement of Comprehensive Income and Statement of Financial Position.
Qualitative: These are the competency of the management, brand recognition, patents and all other tangible factors surrounding the company.
Neither qualitative nor quantitative analysis is essentially better than the other. Instead, many investors and analysts consider qualitative factors in combination with the hard, quantitative factors.
Framework for Fundamental Analysis
As mentioned in earlier section, for selecting a stock investor has to focus on quantitative and qualitative factors both. For the same, the investors begin with the economy and the overall market, considering the important factors as interest rates and inflation. Next they consider future industry prospects and finally, after deciding that the macro factors are favorable to invest, and having determined which parts of the overall economy are likely to perform well, individual companies are analyzed.

Economy and Overall Market Analysis
Market analyzes the state of economy and the outlook for primary variables such as company’s profits and interest rates. Investors are heavily influenced by these variables in making their everyday investment decisions. If a recession is likely, or under way, stock prices will be heavily affected at certain times during the contraction. Conversely, if a strong economic expansion is under way, stock prices will be heavily affected, again at particular times during the expansion. This is very much evident from the current BSE index movement. External events like lingering European debt problems that emerged concerns over the European banks and overnight murky US economic data, which indicated that the world is going into another recession, and internally, ...

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