Fundamental analysis is like conducting a medical examination on a company to see how healthy it is. You take a look at the company's vital signs—like its earnings, its cash flow, its return on equity and so on—to see if you believe the company is going to be able to continue growing and generating profits for its owners. Because after all, as a stock holder, you would be an owner of the company.
Companies with strong fundamentals tend to do well over the long term. Healthy companies typically have healthy stocks. While strong fundamentals are certainly no guarantee the company's stock will perform well, they definitely put the odds in your favor. It's like watching a horse race and putting your money on the horse that is favored to win the race. You won't always win, but you usually will.
Now, if you're wondering if you have to have an accounting degree or be a math whiz to conduct a proper fundamental analysis, don't worry. You don't have to be a brilliant number cruncher to conduct a basic fundamental analysis. Once you learn to identify a few key numbers and ratios, you'll be able to apply a simple fundamental analysis to all of your trades.
Video: Fundamental Analysis
Now that you've got the basics of how to use fundamental analysis to analyze your stocks, check out the video below and see what else you can learn about fundamental analysis at the whiteboard.
Taking Your Next Step
Once you're comfortable with fundamental analysis, it's time to move on and learn about Technical Analysis.
