Hello readers, we are happy to announce that our
team of MoneyWiseMind.com launched a new section “Investing Insights: Weekly Q&A For Stock Market
Newbies”, to spread the
basic stock market knowledge to the beginners.
This is your go-to resource for
demystifying the stock market from the scratch. Each day, we will present 10
carefully curated questions with answers that will cover essential concepts,
strategies, and terminologies. Whether you have just entered into the market,
or trying to starting your stock market journey, or looking to strengthen your
foundation, our weekly post will guide you through the basics and beyond,
making investing accessible and understandable for everyone. Happy reading.
Day
19: Basic Stock Market Concepts
Fundamental Analysis for Beginners:
1. What is Fundamental Analysis in Stock
Market?
Fundamental
analysis is a method to determine and evaluating a company’s intrinsic value by
examining related financial statements with general economic factors. It is an
analysis process of examining a company's financial statements, industry conditions,
management efficiency to determine and analyzing macroeconomic factors to
determine whether a stock is overvalued or undervalued. On the basis of its
current and future prospective worth investors use this process in various
stocks.
2. What are the key Financial Statements used
in Fundamental Analysis?
The
key financial statements used in fundamental analysis are as follows:
Income Statement:
Income
statement provides the company's revenue, expenses, and profit over a specific
period such as quarterly and monthly. It helps investors to analyze past
performance and anticipate future performance of a company.
Balance Sheet:
Provides
a complete picture of the company's assets, liabilities, and shareholders'
equity for a certain period of time.
Cash Flow Statement:
It
gives a details overview of the cash generated and used in operations,
investing, and financing activities for the company's operation.
Annual Report:
This report provides an
overall important information’s about the company. It needs to read the annual
report sincerely to identify any red flags such as issues related to legal
process and unusual risks if any.
3. What is EPS?
EPS stands for Earning
Per Share of a company. It is the key financial metric used to evaluate the
profitability of a company which represents the portion of a company's profit
allocated to each outstanding share of its stock. It is considered as a
significant parameter to anticipate a company's financial health.
Higher EPS means higher
profitability, which creates greater importance to the investors and often
considering higher stock values. EPS is calculated as follows:
𝗘𝗣𝗦 = 𝗡𝗲𝘁 𝗜𝗻𝗰𝗼𝗺𝗲 -- 𝗗𝗶𝘃𝗶𝗱𝗲𝗻𝗱𝘀 𝗼𝗻 𝗽𝗿𝗲𝗳𝗲𝗿𝗿𝗲𝗱 𝘀𝘁𝗼𝗰𝗸𝘀 ÷ 𝗔𝘃𝗲𝗿𝗮𝗴𝗲 𝗼𝘂𝘁𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴 𝘀𝗵𝗮𝗿𝗲𝘀.
4. What
is the Price-to-Earnings (P/E) ratio?
The
P/E ratio which is also known as Price-Earnings ratio or PER is the ratio
of a company's share price to the company's earning per share. This valuation
metric is used to evaluate whether the companies are overvalued or
undervalued. A high P/E ratio may indicate that the stock is overvalued, while
a low P/E ratio might suggest that it's undervalued. It helps investors assess
the market value of the stock compared to its earnings.
5. What is Return on Equity (ROE), and why is
it Important?
Return
on Equity (ROE) is also a financial measurement tool to measure a
company’s financial health. It measures the profitability of the company by
showing how much profit a company generates with the money shareholders have
invested. It is calculated as Net Income / Shareholder's Equity. A
higher ROE suggests the company is efficient at generating returns for
shareholders.
6. What is the Debt-to-Equity ratio?
In
a simple language, the Debt-to-Equity (D/E) ratio signifies how much debt a
company has in its books compared to its assets. It is that financial metric
which measures a company's financial leverage, calculated by dividing its total
liabilities by its shareholder equity. A high D/E ratio indicates a company is
heavily reliant on debt to finance its operations, which may signal higher
financial risk.
D/E
= Total debts + Other fixed payments ÷ Shareholder's equity.
7. What are Dividends, and how do they Impact
Fundamental Analysis?
Dividends
are payments distributed by a company to its shareholders, typically from its
profits or earnings. The amount of dividends and payment modes are determined
by the company's board of directors. Companies that consistently pay and
increase dividends are often viewed as financially healthy. Dividend yield and
payout ratios are important metrics in fundamental analysis to assess a
company’s stability and growth potential.
8. How do Macroeconomic Factors Influence
Fundamental Analysis?
Macroeconomic
factors influence fundamental analysis in terms of intrinsic value of an investment
that can affect buying and selling rates potentially. Some examples of macroeconomic
factors include interest rates, inflation, GDP growth, and employment
levels, economic growth rate etc. These factors have potential influence on the
overall economy and can impact a company’s performance. For example, rising
interest rates may increase borrowing costs, while economic growth can boost
consumer demand and company revenues.
9. What is the Significance of Free Cash Flow
in Fundamental Analysis?
Free
cash flow (FCF) represents the cash a company generates after accounting for
capital expenditures and operations needed to maintain or expand its asset
base. It’s a crucial indicator of a company’s financial health and ability to
pay dividends, buy back shares, or reinvest in its business without relying on
external financing. FCF is an important metric used in FA that helps investors
to assess a company's financial health, growth potential and capacity to
generate returns.
10. How does Management Quality affect
Fundamental Analysis?
The
quality of a company’s management plays a significant role in its long-term
success. It is an important factor to asses a company's value and long-term
performance. Because, a good quality management team can help a company to grow
and succed. Investors look for experienced and trustworthy leadership that can
effectively allocate resources, drive growth, and navigate challenges.
Evaluating management involves reviewing their track record, corporate
governance, and strategic decisions. Management strategy plays a crucial role
on overall success of a company and as a result, investors gain confidence to
invest in it.
If you have any other questions in your mind
relating to stock market basics or need any clarification, please put your
query into the comment box, We will try our best to clarify the same
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
