How to conduct fundamental analysis and invest wisely
Photo by Fabian Blank
Relying on social media platforms, self-proclaimed investing gurus and online forums for investing recommendations can be disastrous.
Whether you’re assessing the potential of a company or analyzing your existing portfolio, fundamental analysis is the best barometer for gauging the true value of any investment.
Learn the five key steps of conducting fundamental analysis and making informed investment decisions about companies you are interested in.
1. Review public reports – When you have found a company that best fits your investment objectives, the first step is to research and understand how the company makes money and any business risks it faces.
You can gain a better understanding of that by reviewing public reports on the company’s website or those available on SEDAR (i.e. the filing database for the Canadian Securities Administrators) or EDGAR website (i.e. U.S Securities and Exchange Commission’s SEC filing database).
2. Understand the company’s financials – Once you feel confident in the company’s business, the next move is to understand the company’s financials.
This information can be found in the company’s publicly available annual reports. These reports will help you learn about the company’s debt and obligations as well as its net income at the end of the quarter or year. Additionally, you can learn about the company’s return on equity, which can help you determine if it’s using its investment money responsibly.
3. Explore the company’s industry – Next, you want to explore the company’s business landscape. At this stage, you can learn about the innovations, disruptions, and opportunities facing the company’s industry.
This is also a great time to understand the company’s competitors and whether it has the right products and services to compete.
4. Examine the company’s leadership – You should examine the company’s leadership, including board members and executive team.
The purpose of this step is to understand if the company’s leadership has the right experience and management style to make the critical decisions for the company’s success.
5. Finalize your research with trusted and experienced resources – Once you have conducted all of the preceding steps, you can round out your research with additional insights and perspectives on the company.
Utilizing information provided by reputable sources like Bloomberg News, Morningstar.ca, TMX.COM and NASDAQ.com, you can uncover any risks you may have missed during your research or additional growth opportunities. Remember to avoid the temptation of confirmation bias and consider all expert opinions and not just the ones aligned to your own opinion.
The excitement around investing continues to grow, with speculation, social media hype, and ongoing news coverage stoking frenzied investor sentiment.
While fundamental analysis will never guarantee investment returns, it will help you move past the online noise and provide you with the knowledge to make informed investment decisions.