HOW DO I KNOW ABOUT THE POTENTIAL INCREASE IN THE VALUE OF MY SECURITIES (SHARES, BONDS, ETC.)?
You can use the method of Fundamental Research to find the potential increase in the value of your securities.
What is Fundamental Research?
Fundamental Research is a method of valuing securities based on the growth prospects and attractiveness of the underlying business. It involves analyzing the financials, competitive advantages of the business, quality of the management and the competitive environment it operates in, among other factors.
The theory of fundamental research revolves around the fact that the market price of an asset may deviate from its fair value in the short term due to extraneous factors such as investor sentiment or market trends, but will tend to move towards its real or intrinsic value’ over the long term.
What are the factors that analysts look for while analyzing a company?
Fundamental analysts believe that a firm’s fundamental factors are all reflected in the financial statements and are the true indicators of its earning potential and thereby, the future valuation of the securities. Some of the factors analysts may look at are:
- Industry growth
- Competitive advantage of the company and ability to gain market share
- Revenue and Earnings growth
- Quality of management
- Financial and valuation ratios such as margins, return ratios, P/E (Price to Earnings Ratio), etc.
What is the significance of valuation in Fundamental research?
Valuation is one of the most vital elements of fundamental research. The difference between a great business and a great investment is ‘price’. A high price even for the best stock in the world will never earn a great return on investment. The price we pay for a stock matters most and fundamental research helps to determine the true intrinsic value a stock should trade at.