What is Fundamental Analysis?
Fundamental analysis is a form of investment analysis that relies on the underlying characteristics of a business. It is based on the belief that the price of a stock is driven primarily by the success of the company behind the stock. It is different from the technical analysis because fundamental analysis uses the performance of the company’s financials instead of the company’s stock price.
The purpose of the fundamental analysis is to find the intrinsic value of a company and compare it to the market value of the company. The factors that go into finding intrinsic value can be qualitative (quality, not measurable), and quantitative (measurable). When you do fundamental analysis research, you are trying to find investments where the intrinsic value is significantly larger than the market value. For example, if you estimate a company’s intrinsic value to be about $15/share and its current market value is $10/share, you would consider that a buying opportunity.
Some problems with this approach are that everyone comes up with a different number for intrinsic value, and you never know how long it will take for intrinsic value to be reflected in the stock price. Proponents of the efficient market hypothesis believe that intrinsic value will never be different from the stock price.