People involved in stock market trading have several tools that they can use to help them decide whether to buy or sell a certain stock and when. Most of these tools involve careful analysis brought by loads of background research. One of the methods used by most traders is what is known as fundamental analysis.

What is fundamental analysis?

In simple words, fundamental analysis is a method of investment strategy where stocks are evaluated by analyzing the financial and income statements of companies. The company’s competitors, competitive advantages and management are also analyzed in order for investors to make financial projections of the company as a whole and consider its effect on stocks. Fundamental analysis bases its evaluation on the historical and present data of a company to achieve a number of objectives.

One of the objectives of fundamental analysis is to evaluate company stocks and predict how its price would be in the future. Another objective of such analysis is to make a projection of a company’s business performance. Still another important objective of fundamental analysis is to assess the company’s management and its ability to make internal business decisions for the good of the business. All in all, these objectives may help stock investors decide on what stocks to buy or sell.

Basic Concept of Fundamental Analysis

The basic concept behind the fundamental analysis approach to stock valuation is considering the different underlying factors that may affect a particular company’s actual performance in the business it’s in and how its potential growth can be projected. Investors using fundamental analysis in determining stocks to buy usually think of their investments as actually like trying to buy a business. By investing on stocks of a promising, well established and stable company, investors can look forward to future gains and profits.

Advantages

One of the advantages of fundamental analysis is that it can help uncover some of the hidden gems in the stock market. There may be a company that have valuable assets, stable earnings and a strong balance sheet and yet its stock price value may not yet reflect on its true capacity as a performer. Fundamental analysis may also help in predicting long term economic and demographic trends that may help investors find worthy stocks to put their money on.