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FUNDAMENTAL STOCK SELECTION METHODS

Written by Administrator

Monday, 11 June 2007

Fundamental analysis is about using real data to evaluate a security's value.

The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price in hopes of figuring out what sort of position to take with that security.

One of the most famous and successful users of fundamental analysis is the Oracle of Omaha, Warren Buffett, who has been well known for successfully employing fundamental analysis to pick securities. His abilities have turned him into a billionaire.

Investing, not speculating.

Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). As Bill Graham (the father of fundamental research) states: "An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

Fundamental analysis is considered to be the opposite of technical analysis, in which we only look to the chart. Fundamental analysis is by nature focussed on long term investments, while chart studies can also be used for daytrading. Here at smallcaps.com, we're interested in fundamental long term investments in promising smallcaps, and chart studies are used to help us time our buys and sells.

Questions

Here is a list of fundemantal questions that grab the important aspects of fundamental research.

INCOME

What are the quarterly and yearly earnings ?
Are they increasing over time, is the company making progress ?
Does the competition have similar earnings ?
Where exactly does their income come from, and is it growing over time ?
Is the company crippled in debt, is debt growing or shrinking ?

MARKET CAP

How big is the company, how many shares are in the market ?
What's the volatility, will it move a lot if great things start to happen ?

CHANGE

Is there something that's substantially changed compared to the past ?
Are they about to launch new products that could generate a lot of money ?
New management, an expansion in a new markets, lawsuits ?

BROADER CONTEXT

What's the world around the company doing ?
Is the general market going up or going down ?
Will the demand for their product rise or fall ?

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