What is fundamental analysis
Fundamental Analysis is an approach to investing in the stock market where we deeply study a company's business to identify opportunities to buy and hold stocks from a long-term perspective. Our goal is to value a company based on its financial performance and growth prospects. Based on analysis, we determine whether the business is worth investing in and what would be a good price to buy the stock.
We know prices in the stock market are influenced by a variety of factors. From the basic business model to competition, policies, and geopolitics, everything seems to affect stock prices. Sometimes, prices fall below what we consider a "fair price". The fair price is a value we assign to a stock based on our fundamental analysis. We consider the business to be "fairly" priced when the share prices reach this value. If the price falls below the fair price, we view the business as undervalued. Conversely, if the share price is above the fair value, we consider the business to be overvalued. Our aim is to spot businesses that are either undervalued or have the potential for future growth. We expect the share prices to eventually catch up with fair value, allowing us to profit from this price swing in the future.
What is the basis of fundamental analysis and why does it works?
Share prices are indicative of the business that they represent. A good business will be valued more than a bad business because good businesses are able to generate profits that the share holders will be entitled to. This fundamental relationship between the share prices and business, force investors to look for good businesses. They cannot overlook the financial performance of companies while deciding the price of a share. When we do fundamental analysis of stocks we try to find the fair price of share as accurately as possible. We know that all the investors must be looking at companies with similar outlook and hence the likelihood of prices to catch up with the fair price is very high. By buying undervalued stocks we make try to buy stocks that are likely to see an upswing in future. Growth companies are little different in regard that we anticipate growth in business and profits in future. The share price might not be accounting the future growth of companies and are undervalued presently.
Why is it difficult to find the fair price accurately?
Businesses are very complex in nature. For big companies, the sheer number of variables that can influence business is very high. The accuracy of measuring these variables is also not very high. The effect of these variables on business is very subjective to the assumptions and the methodology used. Also, the issue with "not knowing what others might know" is always there. With every development, the valuation of businesses fluctuate and the market forces try to re-evaluate the fair price. This makes it very difficult to find out the exact fair price. Having said that, we can always try to reach a range for fair price and keep an eye on developments that can effect a business.
Objective of this course.
We are trying to come up with the process and methods to do value a business and thus the share price. In this course we are trying to figure out the fair value of the stocks basis the established approaches mixed with the authors opinions. The course is not the only one and is not exhaustive in any way. The approach is to get better everyday by learning more on the subject and thus improving the overall process.
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