I see these days beginners struggle a lot when they start investing. This post will help then which kind of strategy is optimum for them and why?
Fundamental analysis is most sought methodology where an Investor looks at the business and valuations of the company rather than just its stock price. Success of the business could be easily determined by company’s Balance sheet and Profit and Loss statements. One should never invest in a company whose business one could not understand. By not understanding business one can miss out certain information and will not identify its intrinsic value of the company.
Basics of business?
A business mainly involves 3 parties. The parties involved are the seller, buyer and business owner who is also a seller. Business owner purchases something from the seller. He modifies or enhances or create a new product out of things which he purchased earlier. He sells the new product at a profit to a buyer.
Fundamental stock pickers should dive deep on how these parties interact with each other. Once someone has understood how business is functioning, it is good to have look at the financial condition and future aspects of the business. An investor always invests his money to create wealth. So it is necessary that his invested money grows with time. Invested money will grow only when a company will do profitable business.
P&L statement tells us about the profitability of the company. Balance sheets give the value of the company. A company’s value is measured in its assets and liabilities. So, it is very critical for someone to understand the nutty-gritty of these financial aspects.
Aspects to look upon in business
- one that can understand
- With favorable long-term prospects
- Operated by honest and competent people, and
- Available at a very attractive price.
An investor should invest only when the underlying business is available at attractive bargain or price. Attractive price should be understood as the worth of the business of the company.
Stock prices of a company have a direct correlation with underlying business of the company. One should not worry too much about 1-10% fluctuation in the share prices as political and global affairs have some or other effect on stock prices.
A fundamental investor should not directly jump on how much return stock has given so far. He should give more weight to company business and its profitability. In the end, one can look at the stock price and its return over a period.
I hope this post has helped you in enriching your knowledge. In next post, we will dive into the technical analysis of stocks.