FUNDAMENTAL ANALYSIS OF STOCKS

 What we do when we say that we are doing fundamental analysis of stocks We actually study the underlying business of that stock. To understand the need of fundamental analysis of business, let’s take a small example.

Suppose you want to eat a chocolate, what you will do? You will go to the market and take a bite of KitKat or have a Munch. This is easy, and this is the way everybody buy chocolates in this world.

But suppose you want to buy the company itself which manufacturers KitKat and Munch. What you will do now? For sure, buying Nestle (the company) will not be as simple as buying its end products (kitKat). Why? Because capital required to buy a company is very large.

But apart from the capital limitation, as an investor we must also be careful buying in buying Companies. Why? The reason is simple, we should limit ourselves to buying stocks of fundamently strong  compnies.

This is what fundamental analysis does for its investors. It helps people to identify good business  trading at fair price levels.

Fundamental analysis is broad study of business. Here not only the impact of underlying business on its stock price is studied, but the outside influence (like of economy) is also considered.

Who does fundamental analysis? Fundamental analysis is for those investors who wants to buy stocks of business and hold them for long-term. 

Why such investors prefer fundamental analysis? Because fundamental analysis is a method which tells the investor that the business he is considering for investment is strong or weak. When holding period is long (3+ years), it is essential that the underlying business of the stock is fundamentally strong. Why? Because price of stocks of such companies tend to appreciate with time when held for long-term. 

It is also important to note that our stock market is also full of low quality stocks. So on one hand we have fundamentally strong stocks, and on other hand we have a plethora of weak stocks. As an investor it is our responsibility to differentiate between weak stocks and fundamentally strong stocks. Fundamental analysis is that strategy that long-term investor use to differentiate between weak stocks and strong stocks. 

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