Published On: Tue, May 30th, 2017

What To Know About Investing In Fundamentals Right Now

The top financial news stories right now center around the concept of fundamentals and how strong businesses are in this area. As the current media is focusing its attention on U.S. President Donald Trump’s visit overseas, there’s a lot of talk for example about the fundamentals of businesses like the Raytheon Company.

Investors are flocking to Raytheon in the wake of the signing of a massive defense deal with Saudi Arabia, which has investors wondering whether or not the fundamentals are strong or people are only following headlines.

If these are the headlines you’re seeing, you may be wondering what exactly the term fundamentals refers to, and how to gauge the strength of the fundamentals when analyzing stock charts.

photo/ См. ниже via wikimedia commons

The Basics of Fundamental Analysis

In the general sense, fundamental analysis relates to looking at broad sets of data that are expected to change the value or impact the price of a stock based on underlying elements of the business.

Technical analysis, on the other hand, looks at things like trading and price history, while fundamental analysis is about having a complete view of the company and the intrinsic value of its stock.

Tools for Fundamental Analysis

When you’re looking at current events and evaluating specific stocks and funds, you want to look beyond just the stock charts. You want to look at the most commonly used tools of both fundamental and technical analysis.  

Regarding technical analysis, a few of these methods of comparison include earnings per share, abbreviated as EPS, price to earnings ratio, abbreviated as P/E and projected earning growth or PEG. These are just a few of the tools of fundamental analysis. Others include price to sales, price to book, and dividend yield.

Of course, it’s important to understand that none of these tools are in and of itself a magic number that will show you the strength or weakness of a stock, but they are useful benchmarks to use when you’re weighing whether to buy or sell particular investments.

When looking at company fundamentals, indicators used in assessment often include cash flow, return on assets, soundness of capital management, and the company’s history of profit retention.

Financial Statements

In general, while the above are some indicators you can use during a fundamental analysis, you’re going to need to consider some pretty big concepts. You’ll need to research revenue, assets, expenses and liabilities of a company. These are how you’ll determine the potential future performance of a company.

Understand the Downfalls

Finally, if you take the time to learn about fundamentals and how to evaluate companies based on these elements, you will be putting yourself in a  strong position as an investor, but nothing is guaranteed. What can happen in a best-case scenario is that you do your research and see that the market has made a mistake in pricing, and you take advantage, but in worst case scenario, you see what looks like a great opportunity based on fundamentals and it turns out to perform poorly.

As an investor, you always need to be prepared for this and don’t go into any stock selection scenario thinking you are always going to pick winners. Of course, with fundamental analysis, you do not just depend on luck, which can give you an advantage.

Author: Carmelo Hannity

photo Gerd Altmann via pixabay

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