“Only buy something that you’d be perfectly happy to hold if the markets shut down for 10 years”

This quote by Warren Buffett perfectly captures the spirit of fundamental analysis. Great investors like Warren Buffett, Benjamin Graham, and peter lynch have built fortunes using fundamental analysis.

But exactly, ‘What is fundamental Analysis?’ or how does fundamental Analysis work? The majority of us believe that fundamental analysis is only for experts. But this is not true.

We do fundamental analysis every day. This includes –

  • Your mother is deciding whether to buy ripe tomatoes or raw tomatoes.
  • You are deciding between the iPhone 12 Pro Max and Samsung S21 Ultra.
  • You decide whether to eat fruit or have panipuri.

The idea is to buy or invest in something for the long term. Raw tomatoes have a longer shelf life. Fruits are good for long-term health.

Fundamental analysis is the bedrock of trading. Basic knowledge of fundamental analysis will help you lay a better foundation for your investment decisions.

Suppose you want to invest in a business for the long term (say 3-8 years) it is essential to understand the business from different perspectives. The evaluation of its financial, non-financial, quantitative, and qualitative factors becomes important. Simply put, a fundamental analyst evaluates the medical care and performance of any business by tracking fundamental numbers and leading financial indicators.

Let us understand the need to learn fundamental analysis with an example-

Let's say you don't know how to do fundamental analysis. You want to invest in any stock for the long term. We have two stocks; one is Tata Motors and the other is Bharat dynamics ltd. Which stocks would you prefer for investment? Many of us choose Tata Motors because we hear about this brand every day. Your stock-picking decision will be an emotional one. But if you know how to do fundamental analysis, your opinion on investing would be different.

As you know, Tata Motors has been in net losses for the last 5 years and it is possible that its losses have increased further and it might go out of business. On the other hand, the stock price of Bharat dynamics ltd has increased from 2 to 40. The fundamentals of this company are good and it is doing great in the market.

That's why we need to learn fundamental analysis. It helps to show the bigger picture and make the right decision while choosing a stock for a long-term perspective. When we know fundamental analysis, we will make decisions based on what we see, not emotionally.