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Stocks: Fundamental Analysis

2512 words - 10 pages

People are always interested in different ways of earning money and actually this aim can be met not just by hard work, spending many hours on a particular job. There are other different ways, which actually also require some effort, but of the other kind. One of them is stocks. Playing on the stock market can give a person an opportunity to win much, though it can also leave him with huge losses. So, in order to be successful a person needs to use some techniques, and attack the problem thoughtfully. Sometimes people can earn money on the stock market just due to luck, but it is more an exception than a trend, and those who are really interested in the stock's world rely on one of the two techniques: technical or fundamental analyses. This research will be directed to the understanding of the basics of fundamental analysis and particular steps of stock evaluation.Firstly, it is very important to underline the difference between the two analyses. Technical analysis lies in thinking that "historical price series, trading volume, and other market statistics exhibit regularities" (Vaknin, Sam, par. 10) and past prices can predict changes. Fundamental analysis in its turn pays attention to the value of the stock and "refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements" (Janssen, Cory, par.2). Fundamental analysis investigates the forces that have an affect on the company using a top-down method, starting from studying the economy, through industry groups to specific companies. Based on the combination of studying the characteristics of these three parts, fundamental technique determines today's market value of the stock and tries to predict future changes. "If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either over or under valued and the market price will ultimately gravitate towards fair value" ("Fundamental Analysis," par. 1). In other words, fundamentalists want to buy stocks that are priced less than they are really worth, thinking that the market will determine the real value and investment will pay for itself soon.First thing that should be evaluated in fundamental approach is the economy. Companies' success or failure depends on whether the economy expanding or contracting. If the economy is developing, company's profits increase and its stock will be valued more, and vice versa. Economic growth or weakening is also linked to interest rates. "Interest rates are seen as a leading indicator for the stock market" ("Fundamental Analysis," par. 3). So, there is a positive correlation between interest rates and stock prices, and stock prices change in the same direction as interest rates. Other information in the economy that can help in company's evaluation is: "employment data, the reports put out by the Monetary Policy Committee (to get an idea where interest rates are headed), trade with other countries, retail sales and...

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