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How to Choose A Stock: Fundamental Analysis

howtochoose Many TradeHero users (especially if you’re new) may ask, I have the application, but I don’t know how to choose a stock to invest in? How do I go about researching on stocks if no information is given to me? What do the many financial terms in the application mean? I still don’t know Market Terminology? Fret not, the answers are right here. We will be bringing you through an overview on How to Choose a Stock.

How to Choose A Stock:

Before you begin your adventure in the markets, we suggest you take time to understand the different types of traders out there. When choosing a stock, there are several ways people can choose to analyze, and the two most popular methodologies are Fundamental Analysis and Technical Analysis. This post will be on Fundamental Analysis. Having basic knowledge about the stock market will help in investment decisions. Do not worry if you do not fully grasp the terms and figures that we are about to introduce just yet. Trading takes more than just theoretical assumptions, it requires a fair amount of application as well! Are you ready?

Fundamental Analysis

Just what is fundamental analysis? To put it simply, fundamental analysis is examining the underlying drivers affecting a company’s well being. Traders often use a Macro -> Micro method (or a top-down approach) when using fundamental analysis, and that comprises of the economy, industry and company analysis. Using a top-down approach will allow you to have better research results according to what you are looking for! The three different levels of fundamental analysis:
  • At economy level, fundamental analysts focus on economic indicators and reports to assess how well the economy is doing and how well the economy is going to do in the future. These indicators include GDP, retail sales, inflation and unemployment figures.
  • At company level, fundamental analysis involves the examination of the balance sheet, the income statement, management, the company’s debt and cash flow. Financial and annual reports are usually being used as research material when forecasting profits of the company stocks. This will help in getting a basic understanding of the pricing in the stock market.
  • At industry level, the analysis involves understanding industry supply and demand forces, competition and industry regulation. Often enough, stocks are not lone rangers. They tend to move in groups! Factors such as overall growth rate, market size, and importance to the economy are considered when analyzing industry groups.

Fundamental Trading

A good example of a person with successful fundamental trading and investing is Warren Buffet. He has managed to achieve exceptional returns by analyzing company/industry/economy fundamentals and investing in companies he felt were undervalued. Trading on fundamentals is associated with a ‘buy and hold’ strategy (long-term) rather than a ‘daily/weekly’ (short term) strategy of investing. There are, however, specific instances in which trading on fundamentals can generate some nice profits in a short period. This is called momentum trading, which we will revisit in another post! Here is an example: Lets say you are looking to invest (buy stock) in a company that produces biscuits. Before you do so, you should ask yourself the following questions: Company level: Are the sales increasing year-on-year? Is the product so good/unique that the trend will continue in the following years? Is the company financially healthy or is it massively in debt? Is the management preforming a good job; is this reflected in the company’s financial statements? Industry level: Who are the competitors? Is there space to grow and achieve market share or is the industry too saturated? Is there any regulation in the horizon that my affect the company’s profit/sales in the future? (Examples: changes in health and safety, packaging, distribution laws) Economy level: Can you identify what stage of the economic cycle we are in? Is there a healthy economic growth in the countries the company operates in? (Controlled inflation, low unemployment, stable consumption) Are there any upcoming macro economic or political decisions that may dent the company’s sales and operations in those specific countries?   As you can see, the more detailed your analysis is, the more you will know about the company/stock and the more confident you will be with your final decision. You will certainly need to put in an effort to become our top Hero! Remember that when you select a stock on TradeHero, you can read stock related news on the Buy/Sell screens. So before you make a decision, take in as much updated information as you can! Visit our website at www.tradehero.mobi for more information. A list of Market Terminology that is essential in your trading journey is also found on our FAQ page. Stay tuned for the next post on Technical Analysis!  

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