There are many ways to analyze a stock for investors to arrive at an investment decision. Ideally, you will want to buy low and sell high. The two most basic forms of analysis to find potentially undervalued stocks can be done through fundamental analysis and technical analysis.
Fundamental analysis involves analyzing a company’s economic and financial factors to determine an intrinsic value. A stock’s intrinsic value is the true or fair value of the company, which differs from its market prices. Market prices indicate what investors determine a company's price to be through supply and demand.
The goal of fundamental analysis is to find stocks with an intrinsic value greater than their market value. This would indicate the stock is undervalued. If these are flipped, market value is greater, than the stock is overvalued
Searching for these undervalued stocks can be done both quantitatively and qualitatively. Most quantitative or number-based techniques rely on evaluating a firm’s financial statements, ratios, or industry averages. Qualitative metrics rely more on intangible aspects of the business like its brand recognition. For example, everyone knows what Coca-Cola is. This presents a competitive advantage that other competitors might not have, making it more valuable. We will dive into several other techniques in different Bites to uncover a way that might work best for you.
Fundamental analysis is like looking under the hood of the car. If everything is running great and the car is in good shape, it might be worth the buy. Conversely, if you find any problems looking at the engine or when inspecting the body of the car, it will raise some red flags that will let you know not to buy. It will take some time to inspect the car, but it will help ensure that it is reliable.
Overall, fundamental analysis is a time-intensive and long-term approach that requires investors to review documents, analyze the public's perception, and much more. Putting in the time can produce more ideal returns over the long term and reduce your risk.
Alright, now let’s start diving underneath the hood a bit and divide into ratio analysis.