How To Use Fundamental Analysis When Trading Stocks

There are two major schools of thought when it comes to approaching the market. One is a fundamental analysis and the other is technical analysis. Now these two approaches are totally opposite ends of the spectrum, but both have their place in trading in today's wild and wooly markets.

And any great trader will tell you, it's important to understand each and how to apply them to your trading. So in the first of these three short videos, we're going to be discussing fundamental analysis and how to use it in your trading.

So let's start with a basic definition and build from there.

Fundamental analysis evaluates stocks by attempting to measure their intrinsic value.

I know I'm already throwing new words at you - intrinsic value.

Intrinsic value is a measure of what an asset is worth. This measure is arrived at by means of an objective calculation, and even more complex financial models.

These are objective calculations looking at the company's financial records. These records measure things like the company's debt against their income ratio, or cash flow. Analyzing cash flow allows you to see how started a company is and their ability to handle debt.

The cash flow model also looks at funds for growth, research and development and hiring new talent allowing the company to further grow.

Measuring the company's fundamentals also involves a wider worldview. You have to look at the state of the economy, the existing industrial conditions, and the company's management team. These three factors are more subjective evaluations.

So in short, fundamental analysis is a three step process of looking at the overall state of the economy, the strength of a specific industry, and third, the financial performance of the company issuing the stock.

So who does all this evaluation?

Well, the answer is financial analysts.

Financial analysts are for the most part employed by banks, pension funds, insurance companies and hedge funds. Their whole job is to gather data, organize the information, analyze historic results, and then make future forecasts and projections.

From this information, they prepare presentations and reports with their trading recommendations.

Analysts are searching for companies who are currently undervalued. In other words, the value of the company is much greater than the current price of the stock.

So how do I use these fundamental factors in my personal trading?

When I buy something, a stock for instance, and I want to hold it long term, I want to know

Is it in a good industry?

Is the company output good?

Is the analyzed value to be higher than the current price it's trading?

In our next video, we're going to look at technical analysis of stocks.

Investing Buddies is a group of very successful traders that I lead and I've been around trading in some form since 1972. And when I say successful, I mean the goal of our quarterly data class is to double our portfolio in 10 weeks of trading. And the good news for you is we make it easy for you to try this out. See if we're a good fit. There's a free trial for when you hit the button below.

Thanks for learning about how to use fundamental analysis!