Moneycontrol
Sep 12, 2017 12:08 PM IST | Source: Moneycontrol.com

Looking to find undervalued and overvalued stocks? Try fundamental analysis

Fundamental analysis generally comprises of evaluating economic, political and financial information that are broadcast across various sections of the media from time to time.

Looking to find undervalued and overvalued stocks? Try fundamental analysis

Research analysts offering investment strategies and advisory services in the financial markets generally do so by either evaluating the markets using fundamental data or technical analysis, with a small proportion following both forms of analysis simultaneously.

Fundamental analysis generally comprises of evaluating economic, political and financial information that are broadcast across various sections of the media from time to time.

Analysts, economists, and investors use these statistics to forecast future price movements and put together long- term investment or short- term trading strategies.

The approach to analysing markets based on fundamentals could differ slightly depending on the market segment an investor is looking to invest in.

For instance, investors in Government securities will be more involved in understanding the broader details of a country’s economy and Government policies, while those investing in equities will be more attentive to the financials of a company, market share and sector performance.

Likewise, commodity traders will look to the demand- supply function of commodities especially in the major producing and consuming countries and forex traders will be more focused on the news and statements broadcast by the various Global Central banks, the performance of the US dollar versus the other currencies and so on.

Typically, fundamental analysis is categorised into macro and micro- economics. Macro- economics is the scrutiny of the broader economy, typically in relation to Government policies that generally affect employment, wages, inflation, manufacturing, consumption, GDP, International trade, monetary policy etc.

The primary objective is to analyse economic data and forecast future economic growth.

Micro- economics goes into details of the products and services offered by firms, pricing, competitors and the decision of households and individuals which could affect the demand and supply of these goods and services.

In short, the former is a study of the economy at large and the latter delves into the behaviour of individuals and firms to determine how products and services are priced.

However, both of them are mutually dependent on each other, although the way they are approached could be different.

Analysts looking at macro- economic data to forecast the value of a stock or a sector in particular generally follow the top down approach by starting with the broader economy and ending with the firm.

Likewise, those scrutinizing micro- economic factors begin with the firm and eventually progress to analyse the wider economy.

Image1992017

In addition to macro and micro economics, investors in equities also tend to valuate a company based on their qualitative and quantitative factors that are made up of

• Management
• Industry

• Financials

Fundamental analysis is generally carried out by long- term investors and include the likes of mutual funds, hedge funds, pension funds, insurance companies, investment banks and a large number of retail investors.

The analysis involves anything and everything that can affect the value of a security either directly or indirectly in the form of systematic risk. However, in spite of all the study, there are no assurances or guarantees that the stocks selected would be winners every time.

There can be situations when the security underperforms the industry or the broader index for a reasonable amount of time.

The ultimate objective of the fundamental analysis is to arrive at the theoretical value of the security and compare it with its market price to determine if it is undervalued, overvalued or fairly priced.

Disclaimer: The author is Co-founder & Head of trading, Zerodha. The views and investment tips expressed by the investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sections
Follow us on
Available On