Share Market

Fundamental Analysis is the corner stone of investing. With the subject of investment being very broad, having a number of different strategies the use of fundamentals becomes inevitable.

The biggest part of fundamental analysis is delving into the ‘financial statement’. Also known as quantitative analysis this involves looking at the revenue, expenses, assets, liabilities and other financial aspects of a company. This information is important both for the investor and analyst to get an insight into the future performance of the company. The economic well being becomes more important as opposed to the movement of prices.

Quantitative and Qualitative

The various fundamental factors can be grouped into two categories- quantitative and qualitative. Quantitative fundamentals are numeric and measureable characteristics of a business. The biggest source of quantitative fundamental is the financial statement of a company.

While the qualitative fundamental looks into the less tangible factors surrounding a business such as the quality of its board of management and key executives, its brand names recognition, patents or propriety technology.

Qualitative and quantitative are interlinked. Neither is better than other. For example take the example of Coca cola Company, an analyst may look at its stock’s annual dividend payout, earning per share etc, but the qualitative factor, its brand name is equally important to attract investors.

Intrinsic Value

One of the primary assumptions of fundamental analysis is that the price at the stock market does not reflect the “real” value of the stock. In financial jargon this true value is known as intrinsic value. This brings in the need for a financial analysis. The intrinsic value is of utmost importance to the investor because, an investor always wants to buy stocks priced at a much lower value from the real value. By focusing on a particular business an investor can estimate the intrinsic value of a firm and thus find opportunities where he or she can buy at a discount. If all goes well the investments will pay off well as the market catches up with the fundamentals.

Criticism of Fundamental analysis

The biggest criticism of fundamental analysis comes from proponents of Technical analyses and believers of ‘efficient market hypotheses. For the technical analyst everything depends on the price of stock in a company.

According to efficient market hypothesis content, it is impossible to produce market beating returns in for stocks either through fundamental or technical analysis.