The Reasons Why Stock Fundamental Analysis Is So Important For Investors

Stock fundamental analysis is a reference tool for investors and some traders in selecting and releasing stocks. This analysis technique is essentially aimed at determining whether the price of a stock is lower than its intrinsic value (undervalued) or higher than its actual prospect (overvalued).

 

Let’s get to know more about the meaning and role of fundamental analysis on your stock investment activities in the following article.

Understanding Fundamental Analysis
Fundamental stock analysis techniques are not what ordinary people think when imagining an investor. Instead of monitoring stock movements through charts, fundamental analysts focus on the intrinsic value of a company.

 

Basically, this analysis tends to look at stocks by value or prospects rather than data in the form of charts, which technical analysis often shows. Fundamental analysts thoroughly investigate aspects that can affect a company’s value.

 

The aspects studied can come from the company’s internal factors–such as financial reports and who the officials are–and external factors–such as economic, political, or industrial conditions of the company itself.

Intrinsic Value, An Important Factor in Stock Fundamental Analysis
Stock fundamental analysis uses intrinsic value as a reference to estimate the “true” price of a stock. This function becomes more visible when the price of a volatile stock falls far from its true price, especially when the sentiment on the stock exchange is clouding it.

 

Suppose a stock is sold for $100,000. After examining the intrinsic value of the company, it turns out that investors view the shares as more worthy of trading at a price of Rp. 150,000. Then a buy signal appears because the price is low or at a discount.

 

It should be noted that the price that emerges from the observation of intrinsic value is only an estimate. Usually these forecasts fall at the nearest price. There is no universal calculation that can confirm this price. So, each investor can come to a different price conclusion even though the price range is actually not too far apart.

 

Some important points taken from the intrinsic value are as follows.

The current price of a share determined by the stock exchange does not fully reflect the value of the company itself. This is based on observations on available data.
The company’s fundamental data is more likely to represent the actual stock price.
Stock prices that are affected by the exchange will eventually return to their true prices indicated by fundamental analysis. The problem lies in when that moment occurs, which no one can know.
Two Factors Fundamental Analysis
Quantitative and qualitative are two basic factors in determining company fundamentals. Investors combine the two in order to reach conclusions on the intrinsic value of a stock.

Quantitative analysis
Simply put, quantitative is the calculation of numbers whose sources are dominated by the company’s financial statements, whether it’s profits, assets, to liabilities (debt).

 

Investopedia mentions three financial reports that should be used as material for stock fundamental analysis.

Balance sheet or balance sheet: describes the company’s assets according to liabilities (debt) plus equity (amount of money invested). This balance is used to determine the company’s resources.
Income statement or income statement: shows information about income, expenses, and profit. This report is usually issued by the company on a quarterly or yearly basis.
Statement of cash flows or cash flow statements: shows data cash in and out of the company. This data is important as a reference material because it is difficult to falsify.
Qualitative analysis
Qualitative refers to things that are more felt than calculated by investors. A company’s patents, operations, and executive ranks can signal where a business is going.

 

At least some of the following aspects are included in the consideration of qualitative analysis.

business models. This aspect explains how the company generates income. In practice, there are companies whose main income does not come from their main business model.
Whether or not there is a competitive advantage. This is the company’s ability to survive from competition because of aspects that competitors do not have and cannot duplicate. The iPhone’s dominance in the smartphone market and Pfizer’s patent on the cholesterol drug Lipitor are examples.
Company management. The company’s top management has a big role in the company’s growth. Leaders with a bad track record can be a red light for the company itself.
Corporate governance (corporate governance). It describes a policy that comprises the relationships and responsibilities between company management and stakeholders, such as investors and suppliers. Good company can provide transparency and unambiguous explanation.
How to Invest in Stocks with Fundamental Analysis
Fundamental analysis is a supporting tool for determining buy and sell decisions, which are commonly used by investors with investment periods of up to decades. Swing and position traders can also combine it with technical analysis because their transaction base is not as short as day traders.

 

This analysis begins by examining the company quantitatively. That way, you have a handle in the form of real data. This data is compared again with data belonging to competitors in one industry sector. Qualitative methods are then used to strengthen conclusions from quantitative data.

 

In the next step, you can take external factors into consideration. This factor concerns economic conditions, government regulations, and other things that may have an impact on the company’s business activities.

 

Understanding fundamental analysis is very important in your decision making when investing in stocks. Without it, you don’t have a reference to buy good stocks or you don’t know what to do when the stock market plummets.