Introduction To Fundamental Analysis: Stock Tips

On this blog, we look at tips and tricks to frugal living, but we also seek to learn new things that help us become better investors. My aim is to build a reader base made up of savers and discerning investors that can build a secure financial future for themselves. So while it would be easy for me to carry out an analysis and tell you what you should and shouldn’t invest in, I seek to educate, even as I learn. Let’s invest together.

Today, we learn a new term in stocks investing called Fundamental Analysis. There are many ways to establish which stocks to invest in, among them; guess work, emotion, technical analysis, and fundamental analysis. On this blog, we will study the last two, starting with fundamental analysis today.

Fundamental analysis attempts to establish the value of a share, by focusing on the underlying factors that affect the company’s future business prospects. While the most natural tendency is to look at a stock’s price movements when making a decision, fundamental analysis looks beyond the share price in the stock market, to the management of the company, the overall market, it’s financial statements etc to establish whether it’s a good buy or not.

Fundamental analysis is done in two stages:

1. Quantitative Analysis: This is an analysis of factors that can be measured or expressed in numerical terms, that is the numerical characteristics about a business. The biggest source of this kind of data is the company’s financial statements or accounts.

2. Qualitative Analysis is a study of other factors that aren’t numerical but are related to the character of the business and affect it’s success

When carrying out Fundamental Analysis, you look at both qualitative and quantitative factors. For example, when considering Safaricom, you cannot overlook it’s brand (a qualitative factor), and the effect of that on the company’s value. While there are many mobile network operators, Safaricom is easily the most recognizable brand in Kenya right now. A good analyst will use this information to educate his valuation of Safaricom’s shares.

The underlying assumption that Fundamental Analysis makes is that the price of a share in the stock market is not always a reflection of the company’s real value, and that’s why we need to analyze the company deeper to establish it’s true value, refered to as the intrinsic value. Our aim should be to buy stocks whose intrinsic value is higher than what they’re selling at in the stock market. For example, if we were to analyse a share and conclude that it’s true value is Kshs 15, while it’s trading in the NSE at Kshs 10, that would mean the share is fundamentally under valued and therefore a good buy.

Fundamental Analysis also assumes that in the long run, the market will adjust to reflect the fundamental value of the shares. What’s important to note here is that “long run” can be years or days, and is different for different stocks, and that our calculations are merely indicative, not perfect.

All analysis you carry out should serve as a guide, with the knowledge that loss is always a possibility when it comes to investing.

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