Fundamental Analysis

Boca Raton, Florida Stock Fraud Attorney, Russell L. Forkey, Esq.

One of the most important areas in successful investing, in the stock market,  is understanding the various methodologies available to analyze potential investments for purchase and then to determine how long to hold them.  What will be discussed in this article is "fundamental analysis."  Please note that this article is not designed to be complete in all material aspects.  It is being provided for educational purposes only and should not be relied upon as legal or investment advice.

Many new investors believe that if you choose a particular research strategy and follow that strategy, it will guarantee success.  There is no infallible system for deciding what stock to purchase or when to buy or sell it.  Stock picking is an art rather than a science.  There is nothing precise about stock picking because there are numerous facts that come into play such as the human (often irrational) element inherent in the forces that move the stock market.

There are numerous ways to pick stocks.  Stock research strategies are nothing more than the application of a theory - a best guess as to how to invest. 

Some of the types of analysis that are discussed on this website are:

  • Fundamental Analysis (discussed herein)
  • Technical Analysis
  • Qualitative Analysis
  • Income Investing
  • Value Investing
  • Growth Investing

As you can tell from my profile, I have been representing customers for many years against brokerage firms.  One important fact that I have seen develop is that most younger account executives don't analyze their own stock recommendations.  They rely upon "approved" firm investments that supposedly satisfy a customer's investment objectives as opposed to making a determination themselves.  Do you really want someone making investment recommendations to or for you that has no idea how to personally analyze an investment?

Therefore, in this article, I want to make you aware of the concept of fundamental analysis so that, at a minimum, you have heard of the concept.  This will then allow you to ask some basic questions to your account executive about the process to attempt to determine if he understands the same.

Fundamental Analysis:

Fundamental analysis is probably the most basic and crucial aspects of stock picking.  The purpose of fundamentally analyzing a company is to try and find what you believe a stock is really worth as opposed to what the stock is being traded for in the market place.  In other words, what is the intrinsic value of the company now and what will in be in a future time period? 

Some of the factors that people look at to try and help them make their determinations are:

  • Prior-year cash flow.
  • Growth rate at which earnings are expected to grow over your time horizon.
  • Cash flow projections over your time horizon
  • Various discount factors
  • Other factors to numerous to list.

Probably, the best source of information from which to extrapolate data to assist you in looking at the fundamentals are the reports that public companies file with the Securities and Exchange Commission (SEC), which can be found and downloaded from the SEC's Edgar database.  This information than can be supplemented by whatever other reliable information that you can find relating to the company that you are looking at and where that company is positioned in its industry segment. 

While the above discussion is simplistic in scope, it should assist you in, at least, getting a feeling as to whether or not you account executive has even rudimentary skills in the area of fundamental analysis.  If not, you may want to look elsewhere.