Using fundamental analysis
If you are reading this, you are most likely very interested in stocks ! You may even dream of how to create a solid portfolio that will make you one of the best investors. With all the extras that are especially beneficial as a single. Wherever you are in your journey, it is of utmost importance to learn everything about fundamental analysis so that you can choose stocks for the long term.
You’re probably thinking, “Why do I need fundamental analysis? I just follow my gut.”
That’s a good question. Here’s the answer: You have the chance – no, the opportunity – to operate on the same playing field as multi-billionaires like Warren Buffet, George Soros and Carl Icahn. Without fundamental analysis, it’s like going into war unarmed.
The fundamental investor’s arsenal
To start with fundamental analysis , you need to gather the right information. There is a lot of junk on the internet, but you can also find the gems that can make a difference. It is not just about the numbers, for example market positioning can be very useful. Let’s take a look at the top 3 aspects that should be in your arsenal.
The Financial Reports
Financial reports are extremely important to the fundamental analysis of a company. It is what an engine is to an auto mechanic – the place to check its overall health. Financial reports are usually broken down into three parts.
- The income statement: In short, this is where the company’s expenses are subtracted from its revenues, resulting in the profit that remains. These numbers are crucial. If a company’s profits aren’t increasing over time, something is wrong. Imagine if you had a job where your pay kept getting smaller. You’d probably think about leaving and looking elsewhere. There’s no difference.
- The balance sheet: This overview shows the company’s assets, liabilities and equity. Assets are the assets of a company that have financial value. Liabilities and equity show how these assets are financed. This equity includes investors who invest their money in the company, so that the company invests that money in itself for growth, which results in a profit for both. Liabilities can be, for example, loans from the bank. Companies with low debts and large assets are often preferred by large fund managers such as Buffet and Co.
- Cash Flow Statement: This statement breaks down all the cash a company has used and shows how it is distributed. The statement is usually made up of operating, investing and financing activities. It is a useful tool to determine whether all income is being spent wisely and not just to increase the salaries of the executives.
The Competition and Business Model
Sometimes it’s not how big the numbers are, but how the assets are used that makes the difference. When choosing stocks, the business model and the current (and future) competition of the company are essential.
For example, a company reinvests its earnings in research and development. It will probably pay little or no dividend , but it offers strong growth prospects. Remember that dividends are also a kind of income for the investor.
When a company decides to pay out all its earnings to its shareholders, it attracts the often conservative funds. It also means that growth is likely to be stable, as these are often established companies that have already peaked.
The Board Report
In the annual reports of every listed company, the board must provide a summary of how it has performed. This gives investors the chance to analyze why a company has performed well or not. Sometimes the future plans are also detailed, allowing you to decide whether they are good or not. This is the golden ticket for fundamental analysis. Being able to see the progress – or lack of progress – in a company’s plans gives you as an investor an indication of the direction the company is heading.
Turn your analysis into action
Now you know the top three factors that fundamental investors use to choose stocks in the long term. How you use the factors depends on what kind of stock you are looking for: stocks that pay constant dividends with low growth potential; or stocks that pay little to no dividends but can achieve very high growth in the future. Once you have figured this out, you can choose a suitable broker for your investments. Are you looking for a broker that has the best tools and the largest selection? Or a broker that offers less but can therefore keep the costs low? Start comparing stock brokers to find out!
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