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Monday, August 16, 2010

What is Fundamental Analysis?

Fundamental analysis is analysis by looking at the company's fundamental, like its financial condition, and profitability. Using fundamental analysis we want to find the fair value of a company.

The calculation is done by using the time of money concept, which is money now is better than money in the future. By knowing how is the cash flow, the in and out of money, you can count for it’s fair price. That’s the difficult thing to do, because you need to predict how much profit will the company make.

The easiest way to do this is to get valuation from your investment firm. They usually have their own research department, and can give you the target price or fair price of a stock. The hard way is to calculate the fair price by your self. To do this, you will need good financial knowledge, and master the industry condition. Choosing big companies with good fundamental, finance performance will bring lower risk, but not always high return. The analysis can be done using economic indicators such as GDP, inflation, interest rate, and oil price.

This strategy is done by selecting cheap / undervalue stocks that has low risk, and good profitability.