What is Fundamental Analysis in Stock Market?

Brief Description

Fundamental analysis is used to understand any business. If an investor wants to invest in the market for a long time, then he should properly understand the business in which he is investing. Fundamental analysis helps in this task of viewing and understanding the business from many angles. It is important for the investor to look at the functioning of the business away from the day-to-day hustle and bustle of the market. The share price of fundamentally strong companies increases over time and the investor benefits.

There are many such examples in the Indian market like Infosys, TCS, Page Industries, Eicher Motors, Bosch India, Nestle India, TTK Prestige, etc. Each of these companies has given an average compound annual return (CAGR) of more than 20% for more than ten years. You can understand it in such a way that the money of every investor who invested in them was doubling in 3.5 years. The higher the CAGR return, the faster your capital will grow. Some companies like Bosch India have given a CAGR of up to 30%. So now you must have understood how fast and how much money can be earned by investing in fundamentally strong companies.

By looking at the charts of Bosch India, Eicher Motors, and TCS Ltd given below, you can get an idea of ​​how the wealth grows in the long run. Remember that these are just three of the many examples of the Indian market.

You might think I’m just showing the cool charts. You must be wondering how the charts of Suzlon Energy, Reliance Power, and Sterling Biotech will look like. Look at them too.

These are just three of the many examples of money sinking.

To make money, it is important that you recognize the difference between earning and loss companies. Every earning company has certain qualities that make them stand out. Similarly, companies that sink money also have some special identity and a good investor recognizes it.

Fundamental analysis is the technique that helps you identify the right company and give you confidence for long-term investment.

Can I become a Fundamental Analyst?

You absolutely can be. It is a misconception that only chartered accountants or people with commerce backgrounds can become good fundamental analysts. To become a good fundamental analyst you just need to learn a few things:

• Understanding Financial Statements
• Every business needs to be understood with the perspective of its industry
• Must know maths

In this chapter, we will learn the first two things from the above list so that we can come to a fundamental analysis.

I know technical analysis, what is the need to understand fundamental analysis?

Technical analysis gives you small benefits. It tells you the exact time of entry and exit in the market. But this is not the right way to increase wealth. You can become rich only if you make good long-term investments. By the way, it would be better if you use both technical analysis and fundamental analysis. To understand this, let us once again look at the chart of Eicher Motors.

Suppose an investor considers Eicher Motors to be a fundamentally strong stock and invests in it. He invested in the company’s stock in 2006, as you can see in the chart that between 2006 and 2010 the stock did not make much money. The rally in the stock started only after 2010. This also means that Eicher Motors did not give good returns to the investor in this investment based on fundamental analysis. If this investor had made small trades between 2006 and 2010, he could have made more profit. Technical analysis is beneficial for small deals like this. That’s why you should use technical analysis and fundamental analysis together. This is based on an important strategy of investing money, which is called The Core Satellite Strategy.

Suppose an investor has ₹500,000, he divides it into two halves, for example in the ratio of 60% and 40%. He invests 60% of this amount i.e. ₹ 300,000 for the long term and for this he finds a fundamentally strong company. This investment of ₹ 300,000 forms his core portfolio. You can expect the core portfolio to grow every year at a CAGR of at least 12 to 15%. The remaining 40% of the money i.e. ₹ 200,000 can be used in short-term trades using technical analysis techniques. This is called a satellite portfolio and returns of 10 to 12% can be expected in this too.

Tools of Fundamental Analysis

The tools used for fundamental analysis are very simple and are available to everyone for free. For this you need:

Company’s Annual Report – All the information you need for fundamental analysis is in the company’s annual report, you can download it from the company’s website.

Industry-related data – You also need industry-related data to know how the company is doing. This data is also available free of cost. For this, you have to go to the website of that industry association.

News Tracking – Everyday news keeps you informed about the company, about the industry, and about the economy. A good newspaper or news channel can work for you.

Microsoft Excel – Although not free, it is a must for your fundamental analysis calculations.

With the help of these four tools, you can do fundamental analysis and it will not be less than the analysis of any other fundamental analyst. Research departments of big companies also work in the same way and they also try to make their research simple and rational.

Highlights of this chapter

1. Fundamental analysis is used for long term investments.
2. Investing in a company with good fundamentals increases your capital or assets.
3. Through fundamental analysis, you can know the difference between a good company i.e. investible company and a bad company.
4. Every investable company has some of the same qualities that are seen in all good companies, in the same way every bad company has some qualities which are seen in every bad company.
5. Fundamental analysis helps you identify these qualities.
6. For a good strategy in the market, both technical analysis and fundamental analysis should be used.
7. To become a Fundamental Analyst, you do not need any special skills, just common sense i.e. practical intelligence, a little maths should be there and you should know how the business works.
8. The core satellite approach is a good strategy to invest money.
9. The tools required for fundamental analysis are very simple and available to all for free.