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How to do Fundamental Analysis of a Company?

How to do Fundamental Analysis of a Company?
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Investment in the stock market is subject to many factors but the fundamentals of a stock are one of the major things that constitute the long-term performance of the company.

Here we have a guide on how to do the fundamental analysis of a company that can generate good returns in the long run.

What is Stock Market?

As the name suggests, the stock market is a market where stocks are bought and sold. There are two stock markets in India popularly known as National Stock Exchange and the Bombay Stock Exchange.  And, to regulate these markets, there is a statutory body called SEBI or the Securities and Exchange Board of India. Before understanding the word stock market we need to know the meaning of stock as well. Stock, alternatively known as share also is a share of a company.

So, when you are buying a share of a company, in a way it’s the ownership of the company that you are buying and the attitude of becoming the owner of the company makes a whole lot of difference in the fundamental analysis. If you are investing your money in a particular business you need to know the business fully.

How to do a Fundamental Analysis of a stock?

Understanding the Business

Imagine that you are buying a business you don’t have an understanding of, and how bad it can turn out to be. Most people do this mistake of not understanding the business model but investing in the company just because of Fear of Mossing Out. Invest in something that you understand believing that it’s your own business and given an opportunity, you would be able to run it.

Understanding the potential of business

Then if the business is running smoothly now but what about its future? It is also required to be studied so that the potential of the current business can also be understood. Something that is doing well now but if a new competitor enters, can it face the competition? An understanding of the current and potential competition in the market shall be analyzed before investing.

Understanding of the Product

The most important thing is what exactly the business is selling or offering, if not understood properly would create collusion. Investing in companies whose products you are familiar with is a brilliant idea as you understand whether the product is good or not. If you yourself are not ready to use a particular product, how do you expect others to prefer it?

The business mote

Mote is a unique strength that only your company has. Examples of mote can be having a monopoly in the market, the lowest possible price, a strong distribution network, or anything that makes you stand out. If your business is unique in a way that cannot be replicated gives a competitive edge.

Owners of the Company

The whole responsibility of a ship lies on the shoulders of the captain. Owners or managers of the business are a set of people who are actually running the business. If the captain is not good in any possible sense, automatically it would create a conflict of interest for the investors as well as the rest of the stakeholders. So, understanding the people who are running the company is again an important aspect.

Financial Performance

If everything is going so well, ultimately, it should reflect in the financial performance of the company. So, analyzing the financial records of the company is again something that cannot be ignored. Understanding the financial position, stability, liquidity, future forecast, etc. makes a business strong and unique.

The debt factor in the company

If the fundamentals of a company are strong, no matter how bad the situation gets, it will survive. The business is the ultimate thing that determines the growth story of any company and if the company is not able to grow its revenue ultimately it becomes cash or a dog depending upon the situation. But, if it has to become a star things have to favor the growth story of the organization.