You can use many different metrics to evaluate stocks and assets, but fundamental analysis is one of the most tried and tested methods. It might sound complex, but it can be both thorough and straightforward once you get the hang of it. After getting to grips with the basics, you’ll be able to make better decisions around buying and selling investments.
This is a method used to evaluate how much a stock or asset is worth. The proper term for working out this “real” or “fair” price is known as calculating the “intrinsic value” of something. Fundamental analysis also allows you to review areas that could impact the future price. It involves a combination of reviewing the following elements:
There are 2 main types of fundamental analysis:
Learning to use fundamental analysis will give you a direct advantage over the majority of retail investors.
Once you’re able to get your head around a few basic concepts, you’ll have a much better idea about whether you’re paying a fair price for an investment or if it’s undervalued. It will also help you make educated decisions about when to sell your shares.
The best way to understand fundamental analysis is to ease yourself in gradually. Once you have a basic idea of how it works and can grasp the major principles, it’s a good idea to break things down. Don’t try and overload yourself with information because it will feel overwhelming and might put you off.
A great place to start is by learning how to read financial statements like balance sheets. To begin with, you don’t need to know them inside out. Just pick one element, perhaps revenue or debt, to focus on first. Take a look at a few different financial statements to compare figures and get comfortable finding your way around them. Most look very similar. So, once you get the hang of it, you should be able to read most statements.
There are loads of free resources on the internet. You can find plenty of articles and videos breaking down the various elements of fundamental analysis. Or, if you prefer, there are some excellent books that will also show you real-world examples.
One of the best books is Benjamin Graham’s Intelligent Investor. Benjamin Graham was the mentor of a little-known investor called Warren Buffet. And, he’s often referred to as the godfather of value investing, which is based on fundamental analysis.
The most recent edition uses data from the 1970s with some modern commentary, but many of the tools are still relevant. It’s a bit of a nerdy deep dive into analysing stocks. There are also plenty of newer books explaining fundamental analysis for both beginners and more experienced investors.
It can be a vital tool if you’re trying to make intelligent investing decisions like working out whether a stock has the potential to perform in the long run. Yet, as with any investment research method, it’s not a foolproof method that guarantees you’ll always pick the best stocks. However, you will definitely make smarter investing decisions when using fundamental analysis, reducing the chance of making costly mistakes.
It can feel like there’s a lot to learn when you begin exploring how to use fundamental analysis. So, to make things a bit easier for you, here’s a simple step-by-step guide to follow:
To make comparing even easier we came up with the Finder Score. Costs, features, ease and range of investments across 30+ platforms are all weighted and scaled to produce a score out of 10. The higher the score the better the platform – simple.
Read the full methodologyAll investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Whereas technical analysis is based largely upon price and volume data for shares or other assets, fundamental analysis takes more of a holistic approach.
Fundamental analysis can be more useful for investors with a long-term strategy. Technical analysis is often better suited to traders. Ideally, it’s best to use a combination of both forms of analysis because each has its own usefulness.
Here’s a quick rundown of some of the major benefits and drawbacks of using fundamental analysis when assessing stocks and other assets.
This is a fairly thorough way to evaluate stocks and other investments. But, it won’t tell you everything or provide all the answers to your questions. Depending on your investing style and strategy, you may want to incorporate other research methods and forms of analysis before deciding whether to buy or sell an investment.
Fundamental analysis can take a little time to get the hang of. But, learning how to use it can be an extremely valuable skill. Learning a few basic principles and ideas will increase your odds of becoming a more successful long-term investor. However, it’s important to keep in mind that it’s not a perfect system. Like anything, it has its flaws.
Company earnings reports can be a useful tool when researching stocks to invest. Our guide explains how you can use them for your benefit.
Find out everything you need to know about undervalued stocks and whether it’s worth investing in shares that fall into this category.
Learn about stock market charting and how it can be a useful tool to predict a stock’s future possibilities.
Find out everything you need to know about technical analysis to help you become a better trader.
Find out how to properly monitor share performance to track your investments and make better decisions with your portfolio.
Find out what you need to know about annual reports, including how to read and understand them.
Find out how the short interest ratio works and what it means for stocks.