Fundamental Analysis

Before you decide to buy a stock, you must consider two things:
  • Fundamental Analysis: Do I want to own this company's stock?
  • Technical Analysis: Is it time to buy?
Both forms of analysis are required to make a sound judgment. You don't want to buy a stock that appears to be well priced, only to discover that the company is going bankrupt. Similarly, you would not want to sink a lot of money into a company that is so popular with investors that its stock is overpriced.

To make the difference between fundamental analysis and technical analysis clear, you could think of the market as a large discount inventory sale. A technical analyst would simply watch the crowd, ignoring the specific goods altogether. When the technical analyst notices a group gathering in front of a particular table, he'd run over and buy as much inventory as possible, hoping that demand would push prices higher for resale. He doesn't care what the items are that he's buying, as long as somebody else at the back of the line is willing to pay more than he did to buy them from him later.

Fundamental analysis, on the other hand, is the conducting of basic research about a company. The fundamentalist, therefore, takes a more demure approach. The fundamentalist would focus solely on the products before him. He would dismiss the other shoppers as an emotional mob of fools. Once the crowd dissipated from the table, he might wander over to examine the merchandise.

When analyzing a company, you may want to choose companies that have the following qualities:

  • A competitive edge (such as key patents, a dominant share of the market, or the fastest growth of new customers in a growing industry)
  • A healthy balance sheet (low debt, strong cash flow)
  • A record of consistent earnings growth with a strong indication of future growth.
  • A strong management team with a track record of success.
  • Substantial ownership by management and, perhaps, recent insider buying.
  • Strong minority stakes by outside investors.

Conversely, you may want to avoid companies with:

  • Substantial and growing competition and low barriers to entry.
  • A shortfall in earnings, or a possible future impediment to growth, such as new regulations or tax changes.
  • A weak balance sheet (high debt, declining cash flow)
  • Low ownership by management and/or insider selling.
  • Recent resignations of key officers.