Fundamental Analysis is the traditional way of looking at the stock market. It consists of looking at a company’s financial statements, P/E ratios and so on.
This method is based on one simple idea that strong companies will tend to make a profit and grow, in turn that profit and growth will make money for the shareholders of the business. In other words by investing in strength your portfolio will grow faster.
What most fundamental investors try to do is wait for the market to crash. When it does they sweep in and buy strong companies that will not go out of business. Companies like McDonalds, Microsoft, Coke a Cola, are all big companies that are very big and the odds of them failing are very small.
Fundamental analysis assumes that the market is inherently bullish. By buying strong companies at a low price you are pretty much guaranteeing that over a long period of time you will make money in the market.
There are two types of investment styles, growth and value.
Value investing is buying companies that as of today are very strong, have a solid cash flow, and a solid business plans. An example of this would be if Coke drops to $30. The stock would be well off its highs and we all know it is not going to run out of customers anytime soon.
Growth stocks are stocks that need a little help, but they have a strong promise to get it. An example of this is US steel. The recent market crash and lack of demand for steel has brought this stock from its highs in the $190s to around $40. However President Obama’s plain to build roads will increase the need for steel and therefore increase the profit of US steel.
In general Value investing seems to outperform growth investing.
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