Fundamental Analysis Of Stock Trading

Stock trading is a very tricky task and one needs to be acquainted with how to do a fundamental analysis of whichever company in order to make a consistent profit in stock market. Fundamental analysis is a basic of stock trading or stock investing, which gives you a clear idea about the company from all aspect which might impact the business of any company either in positive way or in negative way. From investor point of view fundamental study of company and implementation of proper stock investing strategy can give high returns from your selected stock pick.

The first thing you should know and this is one of the main reasons that any rise in stock price is dependent upon the profit made by the company. The stock price is a reflection of profit and loss made by the company. Any consistent increase in profit of a company gives rise to increase in stock price and any decline in profit or loss made by the company gives rise to decrease in stock price, however at some situation this theory might be wrong as this could only be a temporary phenomenon appear to that company due to some external factor or internal factor that needs to be taken in account.

What is Fundamental analysis?
Fundamental analysis is a study done on a company to find perfect view about the company’s overall past performance and future growth prospectus.


The some of the points that comes under fundamental study is described below but are not limited to following.


Business Category:
Knowing the business category of company is more important for a stock investor to do stock investing. Investor usually looks in which business category the company is conducting business. There are several categories such as Information technology, consumer goods, commodities, cement, agriculture, auto, auto ancillary, hospitality, tourism, construction, telecommunication, finance, airlines, shipping, etc.

Investor who has a medium to long term perspective usually makes a correct view about the future prospect of the company by determining in which business category the company is happens to be. With the season changes, external factor, government decisions or any other internal or external factors various business categories are consistently impacted either positively or negatively so taking all the factors into view investors has to make his investment decision and time horizon. The company that captures, protects and manages intellectual property effectively can expect to profit from greater net revenue and higher market value. Companies which are aggressive in their particular business category, making innovative things, doing lot of research and development and are eager to make their policy changes according to the situation arises are mostly thought to be a winner and can make consistent profit and can rewards their shareholder also with that.

Profits/Loss or Bottom Line Growth
With the growth of internet it is now achievable for every investor to take a look at company website for their quarterly result. It has been mandatory for every company listed on stock exchanges to declare their quarterly result. The quarterly result clearly shows the overall performance of the company i.e. company is making profit or loss. If the company is consistently making net profit it is a positive sign for stock trading or investment.

Sales Growth
Same like profit/loss, investor can also review at the sales figure of the company and can compare that with the peer group for getting an exact idea how well the company is achieving big sale or loosing their market sale. Company which shows steady sale or increase in sale indicates a positive sign for stock trading or investment and will have a positive impact on stock valuation.

Market Capitalization
Market capitalization can be determined by the current market value of the company's shares which is the total number of shares multiplied by the current price of each share. With the help of market capitalization investor can determine in which category size the company happens to be i.e small-caps, mid-cap or large-cap.

Management Team of a Company
The management team plays important role in any company’s overall performance. Company growth depends on management decision and execution process along with the future guidance that company management predicts in coming days. Investor makes a careful look and reviews the management capability in future growth of the company. An efficient, trustworthy and integrity management team indicates a positive growth sign of a company and investor finds no harm in making investment in such a company.

Volume
Volume is an indicator from fundamental and technical analysis point of view. Investors as well as trades usually prefer doing stock trading or to do investment in high volume stock as it protect them from any future uncertainly if happens in the stock. If investor or traders want to buy or sell the stock, due to more volume their order is executed easily and fast. Low volume stock usually are traded infrequently and large selling and buying of stock cause the price to rise or fall significantly which involves high transaction cost. More the volume indicates more amount of buyers and sellers which help both the side investors and traders to execute their order in low transaction cost. Volume is also an indicator of the liquidity in a stock. Low volume illiquid stocks tend to carry large spreads i.e. the difference between the buying price and the selling price. Volume is a key way to measure supply and demand, and is often the primary indicator of a new price trend. When a stock moves up in price on unusually high volumes it could indicate that big player like institutional investors, mutual fund or a high net individual are accumulating the stock. When a stock moves down in price on unusually heavy volume, major selling could be the reason.

Return on Equity
Stock market guru’s believes that 20% and above earning is considered as a good return on equity.

Price-to-Sales Ratio
Usually investors prefer this number to be below 3, and preferably below 1. This measures a company's stock price against the sales per share. It is believed that a price-to-sale ratio above 3 roughly guarantees a loss while those below 1 give you a large amount of chance to success.

Earnings Per Share (EPS)
Along with other important factors from fundamental point of view, earning per share ratio is also that much important. It gives us a good understanding of company; it determines how much the company is earning for every share. Many of the investors who follow and believe in fundamentals look into EPS before purchasing that particular company stock. Earning per share is calculated by dividing the earnings (net profit) by the total number of equity stocks.

P/E ratio
Price-per-earning gives a better understanding how expensive or inexpensive a stock is. High P/E is said to be expensive and it clearly means investors are paying high price for a stock. Stocks with low P/E's are typically considered a good value. P/E ratio is derived as Price per Stock divided by Earning per Stock. For some investors high P/E ratio does not make any difference from investment point of view. If the company’s earning potential is increasing at higher rate; investor feels no problem paying high price for such a stock.

Debt-to-Equity Ratio
Debt-to-Equity Ratio find out how much debt a company has compared to the equity. The debt-to-equity ratio is done by dividing the total debt of the company with the equity capital. Debt-to-equity ratio more than two is believed to be more, but instead if the number is low, more the company is in safer side and is positive from investment point of view.

Beta
The Beta factor is a comparison with the overall index with a specific stock; basically it determines the volatility of a stock versus overall index. The higher the beta, the more volatile the stock is. Beta stock swings in contrary with the overall index, if the index falls, the stock rises and if the index rises the stock falls.