When trading stocks, there will be times when you will struggle to pick your next investment.
Or as we call it, you will experience a stock-picking bug.
We’ve all been there.
It’s not a good feeling, but luckily for you (and me and everyone else), there are certain tools to help us with choosing our investments.
Tools such as Fundamental Analysis.
Now, before I even go any further, it is important to mention that wherever you are in your trading journey, learning about fundamental analysis is absolutely key for your future as an investor (so don’t go skipping this lesson).
I know what you’re thinking.
Why is Fundamental Analysis so important? Can I not just go with my gut instinct?
When trading stocks, you have the opportunity to operate on a level playing field with billionaire stock investors such as Warren Buffet, John Templeton and George Soros.
But without fundamental analysis, it’s like turning up to hand-to-hand combat with no hands…
But as always, we got you covered!
Keep on reading to learn all about picking the best stocks using fundamental analysis.
Fundamental analysis, or FA, studies the key factors to determine the financial health of an organisation. The analysis takes several factors into account, including the Financial reports, GDP, Inflation rates, Interest Rates, Financial Statements, Business Models and Annual Reports.
The main goal is to find whether the current price of the stock reflects a value that is different from what the fundamental factors and prevailing market sentiment may suggest. And if this difference is found, then there may be an investment opportunity awaiting.
Fundamental analysis consists of three main parts:
An investor can perform a fundamental analysis by looking at various economic factors such as interest rates, inflation, and GDP levels.
By performing fundamental analysis, an investor can identify the industries and sectors of the economy offering the best investment opportunities.
When conducting fundamental analysis of a specific company, an investor looks at a company’s earnings,
profit margins, future growth and returns on equity.
Now, let’s take a look at the key factors from all of the three groups above to watch out for when using Fundamental Analysis.
First things first, check the company’s earnings.
Super, mega important.
It’s what an engine is to a mechanic.
This figure will give you an insight into how much money a company is making and how much it is likely to make in the future.
And that’s one of the most important, if not the single most important thing, you should always look at.
You can find this data in the company’s report earnings that are released every quarter.
If a company’s profits are on the rise, this generally leads to a higher stock price. On the other hand, if the profits fall shorter than expected, the market can hammer the stock.
The GDP report is one of the most important of all economic indicators. GDP stands for the gross domestic product or the total value of the goods and services produced in a country over a specified period. It is used as an indicator of the size and health of a country’s economy. The numbers are released on the last day of each quarter.
Interest rates make the stocks go around!
Seriously, the stock market is ruled by global interest rates.
All of the above-mentioned economic reports are closely watched by the Federal Open Market Committee in order to gauge the overall health of the economy.
The Fed can use the tools at its disposal to lower, raise, or leave interest rates unchanged, depending on the evidence it has gathered on the health of the economy.
When a piece of economic data is released, the fundamental analysis provides insight into how price action should or may react to a certain economic event.
That’s the most excited fundamental analysts get that month!
The Consumer Price Index (CPI) is an important economic indicator released on a regular basis by central banks to give a timely glimpse into inflation levels.
Inflation tracked through CPI looks specifically at purchasing power and the rise of prices of goods and services in an economy, which can be used to influence a nation’s monetary policy.
Those are the top factors that fundamental traders use to pick stocks to invest in, in a nutshell.
How you use each factor depends on the kind of stock you are looking to invest in.
One thing’s for sure though, now that you are equipped with these new fundamental analysis skills, you can certainly feel more confident in your own judgment.
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