Fundamental Analysis

Fundamental Analysis

Rational decisions are taken before the investment based on effective analysis. While they are investing, investors have primary objectives to gain from their investment. Fundamental analysis also suggests that every stock has intrinsic value which should be equal to the value of future income. However, in a fundamental approach real worth of stock can be made by considering the earning potential of the company.

Meaning of Fundamental Analysis:- It is one of the methods in which finding out the future prices of stock which investors wish to buy. It is the process of examining the intrinsic value of a company to find out whether the current market price is true or not. Whether it is overpriced or underpriced. So after the consideration of intrinsic value, the true value of stock can be found.

INTRINSIC VALUE

Intrinsic value is that in which many factors are analysed concerning the value of stock. These factors are assets earning, dividend earning, prospects earning, fluctuates prices of stocks and management of the company.

Moreover, Intrinsic value of security must be determined by using estimates of all other major external factors such as gross national income of the country, industry sales, firm sales and capitalism of the firm.

Calculate of Intrinsic Value:- In short bio intrinsic value of stock is estimated by discounting the company\’s prospective earning stream from dividend of shares holder by shareholders.

So in the fundamental approach which analyses the investment environment as well as factors relating to the specific industry such as management quality, operational efficiency, profitability, capital structure and dividend policy. So the value of shares is discounted due to inflation. So first of all it takes into account the present worth of anticipated earnings.

FUNDAMENTAL ANALYSIS PROCESS

Particularly in fundamental analysis, intrinsic value and market price are considered. Which both can be differ time to time. So investors have to analyse for the purpose of realising profits by taking suitable decisions before the investment in the portfolio.

APPROACHES OF FUNDAMENTAL ANAL.

Fundamental analysis has two approaches through which investors can analyse.

Top Down Approach
Bottom Up Approach

(1). Top Down Approach:- There is some analysis which follows the top down approach. In which first of all the overall economy is analysis as well as securities markets. After it, the second industry is analysis in which the firm operates. At last, analysis of the company is done. Industry forecasts are made based on the economy. But the company\’s forecast is based on the industry and economy.

Economic analysis
Industry analysis
Company analysis

(2). Bottom Up Approach:- In this analysis is done in the reverse way. Firstly such analysis involves the company examination. Secondly, industry analysis is incurred on the way of analysis. Lastly, Economy of the country is an analysis in which the firm operates. So This is called the bottom up approach. However, such an approach uses sparse unknowingly assumptions. Which is not right. But this drawback is not there in the top down approach.

Company analysis
Industry analysis
Economy analysis

But some analysts combined these two approaches for the purpose of fundamental analysis. So by combining these approaches, analysis is made on the basis of the following majors factors.

Economic Analysis
Industry Analysis
Company Analysis

All these three analyses complete the fundamental analysis. While the investors would like to analyse the profitable portfolio in the investment.

Objective of Fundamental Analysis

The main objectives of fundamental analysis are as following

Fundamental analysis is made to identify the underpriced or overpriced securities in the market location where the investors would like to purchase or selling decisions can be made by them.
In the fundamental approach decisions are taken for the long term investment. By this analysis risk of loss can be avoided from buying an overpriced stock and selling an underpriced stock.
Under the fundamental analysis the whole market digs out for earning the potential profits. In which underpriced stocks are purchased and sold in the time of overpriced markets.
Fundamental analysis also helps to know the best industry for the investment which can give more profit than the normal industry profit.
After such analysis decisions about the investment can be moulded as per achieving desired results on the way of investment.

These objectives are achieved by applying such specific analysis before the profitable investment.

All funds managers are interested in such analysis which helps potential investors. These fund managers may be concerned with mutual fund and portfolio management. Because these people are experienced and qualified people. They provide such services to their potential customers.

They know that these days every investor does not want to lose his money. So such investors come to the fund managers for the services of investment decisions. After determining the investment objectives of investors, the fund manager is to make the best plan for the investment. But they are also unable to make appropriate plans as per the desire of the investor\’s objectives and targets.

So here the need of fundamental analysis is arised before the funds manager to make an appropriate policy of investment. Then they have to take help of such a major analysis known as fundamental analysis. After the analysis they reach their target decision. Then they can suggest such an appropriate plan of investment. Which plan of investment can reduce the risk of return of investment and enhance the chance of profits. So such projects taken under such analysis will be profitable for the investors.

Conclusion:- At last we can conclude that a fundamental approach for deepest analysis will be helpful on the way of investment. Which uses the Top down approach and Bottom up approach in this analysis. Which analysis meets the objectives of investment. The success of Fund managers of mutual fund and portfolio managers always depend upon the successful analysis of fundamentals.

Note:- You can also ask important questions about portfolio management. Which determined the avenues of investment. Through which investors can invest.

Avenues of Investment

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