Stock Market Fundamentals Course is a financial discipline favored by some stock market investors. It focuses on the economic characteristics specific to the company and its market in an attempt to assess its real economic value. Investors who use this type of financial analysis attempt to assess the real intrinsic value of an action (part of a company) through the study of several economic elements (evolution of the level of activity, profitability, solvency, prospects, etc.). As its name suggests, fundamental analysis therefore focuses on the fundamentals of the company.
I – What Is Fundamental Stock Market Analysis?
Fundamental analysis is a method of analysis that helps an investor in his decision to buy or sell shares. Its main objective is to accurately assess the intrinsic value of a company and then compare it to its price (stock price).
In order to fully understand this methodology, you must first understand the following basic principle:
(I) The Value of an Asset Is (Sometimes) Different from (Ii) Its Price
(i) The valuation of an asset results from a precise analysis process. This must take into account a certain number of real economic elements (financial ratios, accounting indicators such as EBIT or EBITDA, levels of cash flows, dividends, etc.). One or more objective calculation methods are then applied to these indicators. The results of this valuation process will allow us to define a range of reasonable values for the company and therefore for its share.
(Ii) In The Case of a Listed Share, The Price Simply Corresponds to The Share Price.
Fundamental analysis is built on the following basic assumption: over time, due to the volatility that characterizes the financial markets, the stock price fluctuates. It can thus differ significantly from the actual intrinsic value of a company, thus creating a buying or selling opportunity for stakeholders.
This value vs. price analysis is relatively easy to follow on the listed equity market… To understand this concept, we will use Benjamin Graham ’s excellent analogy with “Mr. Market”. According to Benjamin Graham, there is “a very obliging guy called Mr. Market. He tells you every day what he thinks your participation is worth. What’s more, he proposes to buy all or part of this stake from you at this price (Editor’s note: almost instantaneously these days) … The more this guy will be manic-depressive, the better the opportunities will be for the investor. »
The basic assumption on which Graham’s analogy is built is that the market is not always efficient. There may be over certain more or less long periods, a difference between real value and price. The basic idea of fundamental analysis is therefore to define your reasonable range of value for a company, then to follow the proposals of “Mister the Market” in order to identify the moments when it will be excessively depressed (opportunity to purchase) and the times when it will be excessively euphoric (opportunity to sell).
The key success factor therefore lies in the relevance of the fundamental analysis that you will carry out for a company. Here are some basics you will need.
Ii – What Are the Stages of the Fundamental Analysis?
1. Analyze The Global Economic Environment
A fundamental stock market analysis should always start with a study of the global economic environment. This study makes it possible to identify the “economic period” in which we find ourselves. It also makes it possible to anticipate the next macroeconomic developments and above all, it gives an orientation on the sectors most at risk for the period and those which (macro-economically) seem to present the most opportunities.
The level of risk-free interest rates and their outlook should also be studied with the greatest care. The valuation of a company depends greatly on the level of these rates. This is an extremely important parameter that has a direct impact on both the intrinsic value and the price (stock price) because stock market players are very sensitive to it. The main factor that can cause interest rates to rise is inflation when it is structural.
2. Study The Sectoral and Competitive Context
After analyzing the overall economic situation, the second stage of fundamental analysis is related to the sectoral and competitive characteristics of the company you are targeting.
For a successful fundamental analysis, you must first establish an inventory of the market in which the company being analyzed operates. Understanding the market in which it operates is crucial.
3. Analyze The Activity and Operational Performance of the Target Company
Followers of fundamental stock market analysis often adopt a funnel logic. After questioning the economy as a whole, then the market of the company concerned and the competitive aspects, they are interested in the intrinsic aspects of the company.
To measure the operational performance of a company, it is necessary to take an interest in the evolution over time of several indicators. We can mention in particular: the turnover (revenues) / the operating margin / the EBITDA (gross operating surplus or EBITDA in English) / the operating result (or EBIT in English) / the net result / the net earnings per share / free cash flow generated (actual cash flow cleared of certain accounting items such as depreciation and provisions) / etc.
To make a success of its Stock Trading Expert Courses, it is necessary to be interested in the evolution of all these elements, but also, to compare them compared to the evolution of those of the competitors.
