How to use fundamental analysis to invest in stocks

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Investing your money in stocks can be daunting and overwhelming. Before putting your money into anything, you need to do an analysis of the brand you want to invest in.

A key aspect that all investors should be aware of is the role of fundamental analysis. There is a lot of misunderstanding about what it is and how to do it.

Here’s what you need to know about starting fundamental analysis research.

What is fundamental analysis?

A fundamental approach to investing money is to determine the intrinsic value of a stock. It’s not about how cool or valuable the general population thinks a title is.

There are two main ways to start fundamental analysis, namely:

Top-down analysis – It starts with the broader economy and market developments. You will then review stock market performance against specific sectors, before choosing a selected company.

Bottom-up analysis – Bottom-up analysis is the reverse. You start with the company you selected and progress to the larger market.

There is no better approach to fundamental analysis research. It’s a matter of personal preference, because ultimately you’ll be diving into the exact same information.

The value of fundamental analysis

Relying exclusively on charts to manage your own investment portfolio means you have a major blind spot. Fundamental analysis focuses on the history of a company and its potential for growth in the future.

You will examine a selected company’s objectives, cash flow and management to determine if a stock is potentially undervalued.

For novice investors to be successful, technical and fundamental analysis must be implemented as part of any investment strategy.

Two types of fundamental analysis to choose from

Top-down and bottom-up analysis focuses on the direction of your analysis. Fundamental analysis research can be boiled down to two different categories.

Quantitative fundamental analysis – This focuses on things that can be actively measured. You will inspect the company’s financial statements and balance sheets to perform this type of analysis. Entirely different interpretations can be derived from examining these numbers.

Qualitative fundamental analysis – Focus on factors that cannot be easily measured. It takes experience and involves looking at factors like business model and company structure.

Both types of fundamental analysis are important. There is a significant amount of interpretation involved. The only way to improve in this area is through experience, so keep an open mind when drawing conclusions based on the information above.

5 Tips for Conducting Fundamental Analysis Research

Fundamental analysis is complex and requires a significant time investment to complete. However, it remains one of the best tools for managing your finances.

Here are five tips to get started.

  1. Use reliable sources

Reliable data sources are at the heart of reliable analysis. Tools like the United States Securities and Exchange Commission (SEC) and company websites are great resources.

You can also use third-party tools like Benzinga Pro. This allows you to access a range of releases and company news from one easy-to-use dashboard. Read this Benzinga Pro review to learn more about how these third-party tools work.

  1. Read mainstream news

It is important to know what the general public thinks of a company. Social media sites like Reddit and mainstream news outlets, such as CNN and CNBC, are great sources of information.

Building a sense of public perception can inform your fundamental analysis research findings.

  1. Full background checks of decision makers

A critical aspect of investing in a business is understanding who is running it. Find out the background of their leaders and get an idea of ​​their experience and background.

If a CEO has a long history of running highly profitable businesses, that’s a major boon. On the other hand, if the company’s CFO has bankrupted all the companies he worked for, you might want to consider other investments.

  1. Look for undervalued stocks

The purpose of fundamental analysis is to find stocks that are undervalued and likely to outperform in the future.

For example, if you have found a company that is suffering from a market decline, fundamental analysis can explain whether this is a short-term problem or a cancer that is likely to develop. If it’s the first, chances are you’ve stumbled upon a great investment.

  1. Choose your intuition

Unlike technical analysis, this type of research relies heavily on personal interpretations. Ultimately, the most successful investors learn to trust their guts.

Over time, you’ll develop an instinct for knowing when you’ve hit a big stock, and vice versa.

Final Thoughts

With the rise of alternative investing apps, too many investors spend too much time arguing about which is the best investing app, rather than researching the things that matter.

Fundamental analysis is not an exact science and there is no magic bullet to succeed every time.

It takes time and commitment to develop a system and an instinct to uncover these underrated stocks.

What is your system for conducting fundamental analysis research?