Fundamental Analysis : An Introduction
Fundamental Analysis involves taking a look and analyzing specific Financial Data including valuation ((PE) P/E ratio), seeing how management is performing, looking into the competition, checking sector performance and overall market performance.
It can be used in the form of a "Top Down" approach or a "Bottom Up" approach and each one has its own uses and can be manipulated to meet the analysts specific goals and requirements.
A "Top Down" approach, often begins by taking the "big picture" into consideration. This meaning the global economy first, followed by smaller areas of analysis such as national economy, sector analysis, competitors, individual businesses, management and financial data among others.
A "Bottom Up" approach would be the reverse, starting instead with the "smallest picture", the individual company, and analyzing various larger areas as far up as necessary.
An example of looking at financial data can be found by looking at specific company financial reports as well as using web sites like Yahoo Finance, entering a stock symbol, and then looking at the following sections which can be accessed through links in the left column of the individual stocks web page:
Many other sites provide this information as well such as Unlimited Stock and Fund Insight from Morningstar. Learn More. and through many brokerage accounts. Often you may find the availability of Analyst reports available through your brokerage accounts that attempt to summarize the Fundamental Analysis and Technical Analysis combined in an organized report. Sometimes these are free and other times they require a fee.
You can also perform your research by starting with a Stock Screener to serach for specific fundamentals once you know which ones are important to you. Here's a link to a screener with pre-set screens for you: Pre-set Screens
Here's an example of simple Fundamental Analysis in action: Many times in the past I have noticed a business with very few cars in the parking lot during peak shopping times. This catches my attention and I then start doing some research when I get home on that particular company. What I did without realizing it, was notice something fundamentally wrong with that particular company- very few customers. This is a sign of something potentially much larger and justifies further research in my mind.
Here's a great resource for doing your fundamental analysis to keep you busy for a while (they have a great free as well as premium service): Unlimited Stock and Fund Insight from Morningstar. Learn More..
BTW: One company that comes to mind that this happened to me was Circuit City, and we all know what happened to them.