This type of looking at the problem consists of selecting the stocks based on information regarding the financial situations of the company, its area of activity, and also on comparing the price with other similar ones from the market. The fundamental analysis is useful when investing in stocks for a long period of time (at least a year). Those who use this type of analysis have themselves different objectives of evolution and profit, using mostly certain criteria.
Buying stocks – based on the fundamental analysis
Certain criteria are to be taken into consideration. There are three important categories that can be used alone or in combinations.
1. Value investing – some of the long term investors are preoccupied with determining the value of the business they are placing their money in, searching to buy the stock at the greatest discount possible compared to the calculated value. In other words, the question here is how much do the companies’ goods would be worth if they were to be sold? An estimative answer can be given evaluating active elements they posses (such as lands, fixed transportation means, floating actives) at a correct market price, adding to that the funds the company has. Investors who use this criterion think that the respective business has a future in efficiency if the stock holders are to be chanced, if the economic environment is changed and improved or any other major alteration, at which moment the company would value at least three times as much as in the beginning.
2. Growth Stocks – are used by the investors preoccupied with identifying companies belonging to areas that tend to increase and to expand. They are focusing on the rhythm of evolution of the business figure and profit, determining the growth rate in real terms. This can be forecasted upon the future, but it is necessary to also identity the economic and legislative risk factors that could appear and alter the graph. Also investors reflect upon the quality of that company and their advantage or disadvantage compared to concurrent companies. Usually, growing companies don’t give dividends, the profit remaining just the difference between the buying price and the selling price of a stock. These companies are the most risky ones, especially because of the lack of dividends, which could’ve added some stability.
3. Income Stocks – Income stocks are dividend stocks. Investors prefer these stocks because they give them some stability and a clear benefit. These stocks are recommended if the stock price is lower than the estimated dividend price, and if they belong to mature companies. Usually, when investing in such stocks you are making a long-term investment.
Selling stocks – based on the fundamental analysis
A stock has to be sold if analyzing the situation fundamentally when the answer to the question “Why am I buying this stock?” is not true anymore. The following situations can also be reasons to sell:
– a newsflash about a company or about the entire economic area modifies initial expectations
– the price for the stock has been over evaluated
– over evaluation can be determined by comparing it with the ones from other companies
Source : 19.5degs.com