What Is Fundamental Study & How It Is Helpful To Trade Or Invest In Stock Market?

Fundamental study is ideal for both short and long-term investors because it helps to get a broad view of the overall financial health of company. It is always good to do in-depth study and analysis of a company before buying its shares. According to fidelity, fundamental analysis is a method of valuing a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Hence, we can say that it is a broad term that encompasses many vital elements.

It is also true that people/investors often ignore it because of its complexity, technical depths and other financial and economical aspects. However, it must be noted that it is good to perform in-depth fundamental analysis of a company if you want to play long-term and earn solid profit.

Fundamental study – A prudent approach 

Fundamental study is not only a prudent approach, but also helps to devise a proper investment strategy. It (analysis) will give you many hints and indicates whether a particular stock is worth investing or not. “With a better understanding of the financial statements one can determine a company’s financial strength.” Fidelity. Let us see some of the most vital aspects of fundamental study –

Analysis of financial reports – Yes, it is one of the most authentic and precise way of understand the overall financial health of a company. One can study everything from financial report of a company from business aspects, industry aspects, company’s structure, board of directors, future expansion plans, debt ratio, equity ratios, total reserves, financial ratios, shareholding patterns, net profit, income statement, fund flow, etc. “Understanding a company’s financial statements is step one in evaluating investment potential.” – Fidelity.

Financial reports can enhance your financial knowledge

Indeed, you can study balance sheet and profit-loss statement in detail along with the mission and vision as well as capabilities of the company. According to some experts, financial reports are the best source of certain critical ratios, such as Price to Earnings (PE) ratio, Price to Book Value (PBV) ratio, Dividend yield, etc. “Financial Ratio Analysis can enhance your financial knowledge.”

In-depth analysis of ratios

Earnings Per Share (EPS):  It is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability. The higher a company’s EPS, the more profitable it is considered. – Investopedia

Formula –

Earnings Per Share (EPS) = (Net income – dividends from preferred stock)/(Average outstanding shares)

Hence, we can say that it is a measurement of a company’s profit. If you are an investor, then you must identify the EPS of a company, compare two companies of the same industry and calculate other ratios, as well.

Debt to Equity Ratio: It is the ratio that every stock investor should know; it is very essential because it helps to measure the relationship between the amount of capital that has been borrowed and the capital contributed by shareholders. It is an integral part of the market analysis…

Formula –

Debt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)

Hence, we can say that companies with a debt-to-equity ratio more than 1 are risky and should be considered carefully before investing. Therefore, it is necessary that you understand the Debt to Equity Ratio well before investing in any stock.

There are hundreds of things that stock traders or investors should consider before investing in any stock. However, if it is difficult for you, it makes sense to contact an investment advisory company that can extend its help and improve your overall understanding.