Stock analysis is an analytical method to minimize the risks related to investing within the stock exchange. By conducting a proper and correct analysis you'll minimize risk and increase your returns. The two analytical methods are :
1. Fundamental analysis and,
We shall be focusing on the fundamental analysis.
Fundamental Analysis
Fundamental analysis is a method to research a business or corporation by researching its fundamentals (We shall describe fundamentals later). By researching and analyzing the fundamentals an investor tries to work out the intrinsic value or a fair market value of the share, if the share price is below the intrinsic value it's undervalued and thought of as a buy whereas if it's above the intrinsic value it's overvalued and thought of as a sell. Fundamental analysis can be done in two ways top-bottom or bottom-top approach.
Top-bottom approach
This approach starts with analyzing the basics of the economy like inflation, growth potential, etc. the investors research if the economy is optimized for growth and consistent returns, then they reach a selected industry or sector and analyze competition, market share, and regulations which may affect the companies within the specific industry and eventually, they select an individual stock which is within the promising economy and industry.
Bottom-Top approach
This approach starts with analyzing specific individual stocks which can outperform their industry or sector. The financial statements and management of the business are analyzed.
Fundamentals
There are two fundamentals in fundamental analysis:
1. Qualitative
2. Quantitative
Qualitative Analysis
Qualitative fundamentals are hard to quantify or give an estimated value but they're still important to look at. Qualitative analysis is done by researching the following:
Business Model
One of the primary things checked out before any analysis starts is that the business model of the company. How does the company earn money?
Competitive advantage (Moat)
If a company has a competitive advantage over its competitors it's considered a good thing. Some companies can hold a moat(advantage) for many years and this will give their shareholders excellent returns.
Management
One of the most important qualitative fundamentals is that the management of the company. The management of a company can steer it towards huge success, therefore, knowing about the management is vital.
Quantitative Analysis
Much of the fundamental analysis is spend on the quantitative fundamentals of the company. The quantitative fundamentals are mainly the financial statements. The balance sheet, earnings report, and statement of cash flow are the financial statements released by a company
Balance Sheet
The balance sheet is a report of the business' assets, liabilities, and equity. A crucial point to look for is that the assets of the corporate are less than its liabilities (debt).
Earnings Report
The earnings report states the earnings and profit or loss of the company. It is generally reported on a quarterly or annual basis
Statement of cash-flows
The statement of cash flows is a report of a company's cash inflows and outflows of cash and cash equivalents. It focuses on the following:
Operating income (OCF): Cash generated from day-to-day business operations
Cash from investing (CFI): Cash from investing in assets, from the sale of other businesses, equipment, or long-term assets
Cash from financing (CFF): Cash from paying or receiving issued and borrowed funds.
A Brief Introduction to Valuation
There are many methods to calculate the intrinsic value there's no one single accepted formula. One method used for valuing a corporation is discounted cash flow (DCF) you'll learn more about it on Investopedia.
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