Doc Maher continues with part two of this series.
As I explained in the first post in this series, I evaluated companies for merger and acquisition in my past employment. I conducted thorough analysis of financial statements as well as a company's markets and strategic position. This is one of the uses of fundamental analysis. Some may be wondering how understanding this method will help them work smarter when navigating the markets for themselves. So before we go further, I'd like to address a couple of quick points.
Why should someone know about fundamental analysis?
Fundamental analysis is the way one would determine the health of a company and if its stock is under or over valued. As Cramer says, you need to do your homework before you buy a stock. This usually plays out in the longer run. That is, shares of companies with strong fundamentals will tend to go up over time. However having an understanding of the fundamentals of a company can be helpful to short term traders too. It will tell you if you are dealing with a fundamentally strong or fundamentally weak company. Obviously if you are thinking about going long, you would like the company to be fundamentally strong, even in the short term. This alone may not make it go up in the near future however it is better than having it be fundamentally weak.
Why should or how can they use this information, now and in the future?
This is particularly useful to "investors" who are looking to take positions for several months. Institutions need to do this because they usually have a longer time horizon. They are looking for something that will be worth more in a year. This is partly because it's going to take six months or more to slowly and steadily accumulate a position in the stock. Many smaller "value investors" are looking to do the same sort of thing. There is a school of thought that says only fundamental analysis matters and that technical analysis is a joke. In addition, the only thing that moves a stock is fundamentals and one should never buy anything unless the fundamentals are strong. This of course is only one way of thinking. You need to decide which method or combination of methods is right for your investment decisions.
In the next post, I will discuss some earnings data and how it can be used to partly assess a company's financial health.
"Income Trader"
Doc's previous posts: Puts on Google and The Basics of Fundamental Analysis
Click here for a list of previous TradeKing All-Star blogs.
Nicole Wachs contributed to this post.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Community, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Jonathan F. Maher, PhD has a professional business relationship with TradeKing.
