Fundamental Analysis of Stocks

Every investor wants to invest well. But one of the most important aspects to invest in good stocks is fundamental analysis. Fundamental analysis is deployed by an investor to evaluate a security, bond, or stock to measure its intrinsic value. This is done on the basis of related economic, financial, and other factors. The objective that an investor wants to achieve is to decide whether a security or stock is overpriced, underpriced, or correctly priced. This helps an investor to determine whether to buy or sell the stock.

Thus, fundamental analysis does not only involve a particular stock, but also industries or the economy as a whole. Through fundamental analysis, an investor can answer several questions, such as whether a company has increasing revenue, if it has the stronghold in the market to overcome competition, or if it is in debt. All this and more helps the investor to conclude whether the company's stock is good to be invested in. Although, fundamental analysis refers most commonly to stocks, it can be performed on any security.

There are various factors that determine the economic well-being of a company. These factors can be grouped into 2 categories: quantitative or factors that can be measured and qualitative that is based on the quality of other factors affecting the stock prices.

The quantitative factors may include the following:

Earning of a Company:

Earning, or the profit or loss, made by a company is reflected in its financial statements. An investor should thoroughly study the statements to determine whether the stocks of the company will reap good dividends. There are other factors associated with that too.

Earnings per Share (EPS):

A company's net earning when divided by the number of outstanding shares gives a value of the earnings per share (EPS). This when known for the previous years, can give a good estimate for the years to come.

Price-to-Earning Ratio (PE Ratio):

The PE ratio is the actual market value of a stock. This depicts how much the market is willing to pay for a company's earnings. The price per share of a stock when divided by its EPS gives its PE ratio.

Projected Earning Growth (PEG):

PEG of a stock is its P/E ratio divided by its expected percentage earnings growth for the next year. A lower PEG depicts a good potential for investment as an investor has to pay less with the increase in the earning.

Dividend Yield:

The value of dividends paid per share over some years when divided by a stock's price is known as its dividend yield. Investors prefer stocks with high dividend yields.

All these and more quantitative factors, such as dividend payout ratio, book value, and return on equity are the basic quantitative pillars of fundamental analysis.