Fundamental 

Analysis
CAPITAL MARKETS
What Is Fundamental Analysis?

Fundamental analysis (FA) is a method of measuring a security's intrinsic value

 by examining related economic and financial factors.

Fundamental analysts study anything that can affect the security's value, from
macroeconomic factors such as the state of the economy and industry conditions
to microeconomic factors like the effectiveness of the company's management.
What Is Valuation?
What Is Valuation?

Valuation is the analytical process of determining the current (or projected) worth of an asset or a
company. 

There are many techniques used for doing a valuation.

An analyst placing a value on a company looks at the business's management, the composition of its 
capital structure, the prospect of future earnings, and the market value of its assets, among other
metrics.
What Is Capital Structure?

Equity capital arises from ownership

shares in a company and claims to its
future cash flows and profits. Debt comes
The capital structure is the particular
in the form of bond issues or loans, while
combination of debt and equity used by a
equity may come in the form of 
company to finance its overall operations
common stock, preferred stock, or 
and growth.
retained earnings. Short-term debt is also
considered to be part of the capital
structure.
 Market value (also known as OMV, or "open market valuation") is the
price an asset would fetch in the marketplace, or the value that the
investment community gives to a particular equity or business.

What Is Market value is also commonly used to refer to the market capitalization

 of a publicly traded company, and is calculated by multiplying the
number of its outstanding shares by the current share price. 

Market Market value is easiest to determine for exchange-traded instruments

Value? such as stocks and futures, since their market prices are widely
disseminated and easily available, but is a little more challenging to
ascertain for over-the-counter instruments like fixed income securities. 

However, the greatest difficulty in determining market value lies in

estimating the value of illiquid assets like real estate and businesses,
which may necessitate the use of real estate appraisers and business
valuation experts respectively.
Investing and Fundamental
Analysis

An analyst works to create a model for determining the estimated value of a

company's share price based on publicly available data.

This value is only an estimate, the analyst's educated opinion, of what the
company's share price should be worth compared to the current market price.

Some analysts may refer to their estimated price as the company's intrinsic
value.
Investing and Fundamental
Analysis
If an analyst calculates that the stock's value should be significantly higher than the
stock's current market price, they may publish a buy or overweight rating for the
stock.

This acts as a recommendation to investors who follow that analyst.

If the analyst calculates a lower intrinsic value than the current market price, the stock
is considered overvalued and a sell or underweight recommendation is issued.
What Is a Buy?

Buy can be a term used in a number of different situations, such as the

following:

Investing and
1. To acquire possession and ownership of a good or service in exchange for
payment, either in the form of money or the equivalent value. Fundamental
2. A buy rating is an investment analyst’s recommendation to buy a security,
Analysis
and implies the security is undervalued. Investment banks, brokers, and
researchers will issue ratings on stocks based on where they believe the
stock's value to be.

3. A buy order is an instruction to a broker to buy a security. There are six

types of security orders.
 How a Buy Works

A simple way to think of a buy order is to consider a 401k plan for an employee.

Investing and Oftentimes the employee pre-selects investment allocations based on their investment
selection. When money is deducted from their paycheck for their 401k contribution, the
Fundamental money flows into their brokerage account and a buy order is created based on their pre-
selected investment schedule.
Analysis
A buy rating, also known as a strong buy, is an analyst’s recommendation to buy a security,
on a scale of “buy, outperform, hold, underperform, sell."

As brokers use different stock rating scales, investors should study them, to understand what
the recommendations really mean. For example, “outperform” can mean “moderate buy,"
“accumulate," “overweight," and “add." When equity and bond analysts change their rating
on a security, it will be “upgraded” if there is a positive change, or “downgraded” if there is a
negative change.
 What Is Sell?

The term sell refers to the process of liquidating an asset in exchange for cash.

Liquidation is a term used to describe the conversion of non-liquid assets, such as

real property, stocks, or bonds, into a liquid property, such as cash, through an
Investing and exchange on the open market.
For example, your house is a non-liquid asset, but when you sell it, you convert it
Fundamental into a liquid asset in the form of cash. A sale performed by a government may be
referred to as a disinvestment.
Analysis In investing, especially with options, sell generally refers to the act of exiting a
long position in an asset or security.

In investment research, sell refers to an analyst's recommendation to close out a

long position in a stock because of the risk of a price decline.

Most people invest in stocks to grow their assets—they hope that the stocks they
invest in will grow in value. 
Investing and Fundamental
Analysis
Sell Explained

Since the act of selling an investment crystallizes a profit or a loss, depending on the initial purchase price, it may have tax
implications for the investor. 
The profits from the sale of a non-liquid asset are known as capital gains and may be subject to capital gains taxes. 

Capital gains taxes apply any time you sell an asset for more than you paid for it. 

If you’ve owned the asset for longer than a year, it will be considered a long-term capital gain and will be taxed at a lower rate
than short-term capital gains. 
Capital gains on long term assets in 2019 are 0%, 15%, or 20%, depending on your tax bracket, while short-term capital gains tax
rates correspond to regular income tax brackets. Capital gains from sales of stock are reported on Form 1099-B.
 The selling of holdings is often
Sell Explained disliked by long-term "buy and
hold" investors.

Investing and
Fundamental
However, selling may be a
Analysis
They may believe that market prudent course of action in many
averages usually have positive situations, especially when it
performance over a prolonged needs to be done to rebalance an
period.  investment portfolio or to take
profits out of the market. 
 Investors who follow these
recommendations will expect
Likewise, stocks with Such stocks are candidates for
that they can buy stocks with
unfavorable ratings are being removed from existing
favorable recommendations
expected to have a higher portfolios or added as "short"
because such stocks should
probability of falling in price. positions.
have a higher probability of
rising over time.

Investing and Fundamental Analysis

Qualitative
Fundamentals

There are four key

fundamentals that analysts
always consider when
regarding a company. All are
qualitative rather than
quantitative.
 The business model: What exactly does the company do? This
isn't as straightforward as it seems. If a company's business
model is based on selling fast-food chicken, is it making its
money that way? Or is it just coasting on royalty and franchise
fees?

Qualitative
Fundamentals Competitive advantage: A company's long-term success is
driven largely by its ability to maintain a competitive advantage
—and keep it. Powerful competitive advantages, such as Coca-
Cola's brand name and Microsoft's domination of the personal
computer operating system, create a moat around a business
allowing it to keep competitors at bay and enjoy growth and
profits. When a company can achieve a competitive advantage,
its shareholders can be well rewarded for decades.
 Management: Some believe that management is the most important
criterion for investing in a company. It makes sense: Even the best business
model is doomed if the leaders of the company fail to properly execute the
plan. While it's hard for retail investors to meet and truly evaluate managers,
you can look at the corporate website and check the resumes of the top brass
and the board members. How well did they perform in prior jobs? Have they
been unloading a lot of their stock shares lately?

Qualitative
Fundamentals Corporate Governance: Corporate governance describes the policies in
place within an organization denoting the relationships and responsibilities
between management, directors, and stakeholders. These policies are defined
and determined in the company charter and its bylaws, along with corporate
laws and regulations. You want to do business with a company that is run
ethically, fairly, transparently, and efficiently. Particularly note whether
management respects shareholder rights and shareholder interests. Make sure
their communications to shareholders are transparent, clear, and
understandable. If you don't get it, it's probably because they don't want you
to.
Quantitative vs.  Qualitative
Fundamental Analysis

The problem with defining the word

fundamentals is that it can cover
anything related to the economic well-
being of a company. They obviously
include numbers like revenue and
profit, but they can also include
anything from a company's market
share to the quality of its management.
 The various fundamental factors can be grouped into two categories:
quantitative and qualitative. The financial meaning of these terms isn't much
different from their standard definitions. Here is how a dictionary defines the
terms:

Quantitative vs. 
Qualitative Quantitative – "related to information that can be shown in numbers and
Fundamental amounts."

Analysis

Qualitative – "relating to the nature or standard of something, rather than to

its quantity."
 They are the measurable characteristics of a
business. That's why the biggest source of
In this context, quantitative fundamentals
quantitative data is financial statements.
are hard numbers.
Revenue, profit, assets, and more can be
measured with great precision.

The qualitative fundamentals are less

tangible. They might include the quality of a Neither qualitative nor quantitative analysis
company's key executives, its brand-name is inherently better. Many analysts consider
recognition, patents, and  them together.
proprietary technology.

Quantitative vs.  Qualitative Fundamental

Analysis