Fundamental Analysis Of Stocks
I recently wrote a post about technical analysis, you can view it by clicking here. Both technical and fundamental analysis are controversial topics. Today, though, I will be covering fundamental analysis of stocks. But, my strategy can be applied to any other market, not just stocks.
Does the fundamental analysis of stocks work?
To be honest, I am not a huge fan of full fundamental analysis. But, I use an aspect of it when trading. I will explain how I use fundamental analysis in a bit.
The reason why I am a bit of a fundamental analysis hater is because people have taken it too seriously. What I mean is that I don’t think it’s necessary to go digging in hundreds of financial statements and other documents to make a good trade. In fact, conventional fundamental analysis has never really worked for me. I think the reason why is that the practice is outdated. You can’t compete against banks and institutions that have more data and information than you ever will. Moreover, a true fundamental analysis isn’t easy to do and is very time-consuming.
Obviously, fundamental analysis of stocks works for some people. Those who actually have the proper knowledge. But, if you are like most people, you can get by fine with minimal fundamental analysis. For some reason, I have seen many traders that bash people who don’t use fundamental analysis. These traders usually claim that they do their “due diligence”. The truth is that most of these people are usually very unskilled and inexperienced traders.
Now that I am done with my little rant, let explain to you how I go about using fundamental analysis.
How to do fundamental analysis of stocks
As I mentioned, although I am a big proponent of technical analysis I usually implement a form of fundamental analysis. I usually go about it in a very simple and straightforward way.
Basically, I just go through the following basics:
- Market Capitalization: Is it undervalued or overvalued?
- Will the company still exist in the future (stability of the company)?
- Is the CEO smart and working towards a good cause that he or she truly cares about?
- Have people overreacted to an event or news regarding the stock?
- Does the company have a nice cash reserve?
- Will the business keep growing?
- Will the business be well placed in the future compared to competitors?
- Based on the above create a fundamental “thesis”. You don’t have to be an expert, just go based on your instincts.
There may be some more factors but you get the point. I take a simple approach to knowing if the company will be running well in the foreseeable. Fortunately, this is pretty easy.
I think you can do this successfully on your own. You just have to notice how the markets act regarding valuation and events/news. The patterns become very repetitive as you’ll learn and will give you an extra edge when trading. A nice “add-on” to technical analysis to say the least!