There are basically two types of stock market analysis i.e. Fundamental and Technical analysis. Under Fundamental analysis the analysis of economy, industries and company is done. The main underlying aspects of fundamental analysis is that every company's stock has got intrinsic or real value of it's own. If the market value of stock is less than real value than the stock is said to be underpriced or undervalued. In other hand if market value is greater than real value then the stock is said to be overpriced or overvalued. Stock price is said to be correctly valued if real value and market value are equal or somehow equal. When there are differences in market price and real price then the price of stock in a market start to fluctuate. Though the investors who invest for a short term purpose due to their aggressive nature, meanness and afraid of price fall influences the price of stock, it might not remain for a long term because in a long run the price of stock finds its real value in market. That’s why it is necessary to find the real value of the stock for the purpose of buying and selling stock in the market through deep fundamental analysis. The Father of Fundamental Analysis
A discussion of Fundamental Analysis would be incomplete without giving recognition to Benjamin Graham who is hailed as the Father of Fundamental Analysis. Benjamin Graham taught finance at Columbia University and authorized two books. His first book "The Intelligent Investor" is considered an investment classic. His second book "Securities Analysis" is considered the bible of the Fundamental Analyst. Benjamin Graham taught Warren Buffet, Charles Munger and William Ruane. It is not coincidental that Graham's students are considered as icons in the world of investment but rather it is a glowing testimony to the efficacy of Fundamental Analysis as a method of investing. For secure and long term investment most of the investors wants to make fundamental analysis. These investors are called Value Investors. Benjamin Graham is known as the guru of value investors. One of the richest person in the world, Warren Buffet is also a value investor. He was one of the students of Benjamin Graham.
Fundamental analysis is a non- speculative method of market analysis. Basically there are three major level of analysis and they are: 1. Economic Analysis
2. Industry Analysis
3. Company Analysis
Fundamental Analysis in this field is a better and secure path for the long term investment in stocks. For example if a person have to travel a long distance through vehicles then he/she is concerned about condition of vehicles, road, driver, fuel etc. in a same way a long term investors is also concerned about the economy, industries and company's financial condition, shareholders and their activities and need to make analysis in these field.
Types of Fundamental Analysis
Although it is generally accepted that the aim of Fundamental Analysis is to determine the economic value of a security, it is the practice of Fundamental Analysis that gives rise to two sub types namely Macro-Fundamental Analysis and Micro-Fundamental Analysis. While we are doing Micro or bottom up analysis first we start from company then go to industries then go to national economy and finally go to global economy. In case of Macro or top down approach we start from global economy and go up to the company analysis.
Micro- Fundamental Analysis: The Bottom up Approach
Micro-Fundamental Analysis starts by considering the current price of a stock and compares it to measures of value. Hence the current price of a stock is compared to its dividend, its earnings, and to its assets resulting in valuation ratios such as its dividend yield, price to earnings ratio and its price to asset ratio. The resultant valuations enable comparisons to be made amongst stocks in the same industry groups and undervalued and overvalued stocks are identified by comparisons to the industrial norm. After...
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