A Step-By-Step Guide to Fundamental Analysis

If you are interested in investing in the stock market, you may have heard of the term "fundamental analysis". But what does it mean and how can it help you make better decisions? In this blog post, we will explain what fundamental analysis is and what are the three layers of fundamental analysis that you should consider before buying or selling a stock.

Fundamental analysis is a method of evaluating a company's intrinsic value based on its financial performance, business strategy, industry outlook, and other factors. By analyzing these aspects, you can determine whether a stock is overvalued or undervalued and whether it has the potential to grow or decline in the future.

The three layers of fundamental analysis are:

1. - The first layer is the **macroeconomic analysis**, which involves looking at the overall state of the economy and how it affects the industry or sector that the company operates in. For example, you may want to look at the GDP growth rate, inflation rate, interest rate, unemployment rate, consumer confidence, trade balance, and other indicators that reflect the health and direction of the economy. These factors can have a significant impact on the demand and supply of goods and services, as well as the profitability and competitiveness of businesses.
2. - The second layer is the **industry analysis**, which involves looking at the specific characteristics and trends of the industry or sector that the company belongs to. For example, you may want to look at the market size, growth rate, competition, barriers to entry, regulations, innovation, and other factors that affect the attractiveness and dynamics of the industry. These factors can influence the market share, pricing power, cost structure, and differentiation of businesses.
3. - The third layer is the **company analysis**, which involves looking at the individual performance and prospects of the company itself. For example, you may want to look at the revenue, earnings, cash flow, margins, return on equity, debt-to-equity ratio, dividend policy, growth strategy, competitive advantage, and other factors that reflect the quality and sustainability of the business. These factors can determine the value and growth potential of the stock.

By applying these three layers of fundamental analysis, you can gain a deeper understanding of the company's strengths and weaknesses, opportunities and threats, and risks and rewards. This can help you make more informed and rational investment decisions based on facts rather than emotions or speculation.