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Investment Fundamentals Posted By : admin
Posted On : Wednesday, June 21, 2014

Before going to investment fundamentals, let us be very clear about investment.

 

What is Investment?

According to Benjamin Graham who was one of the best investors who ever lived and he was also the greatest practical investment thinker of all time, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.”

According to Graham, investment consists equally of three elements:

• You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock;

• You must deliberately protect yourself against serious losses;

• You must aspire to “adequate,” not extraordinary, performance.

An investment on a stock should come only after thorough analysis of the underlying business. It should not come as a result of some stimulus by others or a guess work.

 

How to analyze the underlying business?

Fundamental analysis (FA) is a technique which helps to access the underlying business of the stock. This technique attempts to determine the security’s value by focusing on underlying factors that affect a company's actual business and its future prospects.

The FA can be done on the EIC Framework where it represents Economy Analysis, Industry Analysis and Company Analysis.

Economy Analysis is an attempt to predict the course of the national economy, as the Economic activities affect corporate profits, investor’s attitudes and also share prices. Economy Analysis would include study of macro-economic variables like GNP, GDP Growth rate, Industrial Policy, Monetary Policy, Fiscal Policy, Exports, Imports, etc.

For example, the current state of economic conditions in U.S. is dull which implies less business and less corporate profits.

 

Industry Analysis is an attempt to study the variables which affect a particular industry and its business environment. It may be competition scene, market share, characteristic feature of the industry, etc.

For example when we are analyzing a software company then we have to study the variables that affect the software industry like IT spending, emerging technologies etc.

Company Analysis is purely based on studying financial statement and predicting the financial health of an individual company. Financial Statements are the basic and formal means through which the corporate management communicate financial information to the various users. The users of the financial information need information on the aspects such as Liquidity, Profitability, Solvency, Turnover and Valuation.

The company analysis doesn’t stop with analyzing only the financials of the company but it also analysis other qualitative factors like the past performance of the management team, company’s competitive advantage etc.

 

 
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