Getting Started: Fundamental Analysis

Analyze Like a Pro

One of the big ideas behind fundamental analysis is that you're buying the stock to get the financial benefits of owning a prosperous company (see equity ), not for the quick and dirty capital gains sought by daytraders .

Fundamental analysts strive to find companies whose intrinsic value is greater than or will be greater than its market value (this market approach is commonly referred to as "value stock" investing).

What's the key to using fundamental analysis like a professional? Benchmarking . Benchmarking is essentially the process of observing standards against which you can measure the stock you're analyzing. Unfortunately, there are no hard and fast rules for fundamental analysis, which is why even the professionals get things wrong every once in a while.

The best way to strengthen your fundamental analysis skills is through practice. How? Benchmark stocks, develop opinions about them, and analyze the results. Benchmarking, specifically, takes work (no doubt) but it's also the only way to get a feel for the way "good" fundamentals should look.

Homework Time

Here are a few valuable activities you can do to hone your fundamentals skills:

1. Track two stocks for three months. Pick one stock you like instinctively and one you don't. Take a look at the fundamentals of each, and try to make an objective decision about each stock based on those fundamentals alone. Keep a record of how each pick progresses from selection to the three-month mark.

2. Create a fundamental checklist. Take the ratios, numbers, and other information you use the most, and write them all down on a sheet of paper. Make copies, and use this checklist (or "cheat sheet") whenever you analyze a stock. This will help you keep a handle on all the data you'll be reviewing on a regular basis.

3. Build your benchmarks. Every time you analyze a stock you're interested in (using your handy new cheat sheet), take a look at no less than one other player in the same industry to use as a benchmark. As you build a larger mental library of benchmarks, you'll likely find even greater success with fundamentals.