Newbie's Guide to the Stock Market Pt. 3
Part Three: Fundamentals Analysis
You want a fancy lingo? Just mention Fundamental Analysis and your broker might suddenly give you a little respect. Perhaps your friends too. Well, there's actually nothing much to it. Fundamental analysis in my case, covers the following:
1. News
2. Analyst Reports
3. Bursa announcements (includes major announcements, dividends, insider trade)
4. Company Financials
5. Company Fundamentals
1. News
Fundamental analysis can be as simple as whipping out the business section of your newspaper and reading up. The first and most important skill is to be able to identify trends.
Trends in news appear right before there is action in the stock (i.e. price movement). Usually, favourable news would move the stock price upwards, unfavourable news would move the stock downwards.
It might be good to have a look at the stock, and consider buying it if news keep pushing articles or write-ups about a particular company.
However, it is wise to first make a general study on your company before proceed on buying any of its shares. This will be explained in a little while.
2. Analyst Reports
There should be no shortage of analyst reports of companies you "ought" to buy. Often, these reports are issued with a target price for the certain stock. It is advised that one should not "follow" the target price closely as often these are just predictions on an Excel sheet. Analysts can "predict" earnings but real earnings are determined by how much the company's "salesmen" bring in every quarter. Thus, sales projections are only meant to sound fancy. One should definitely pay attention to the management's strength in managing the company.
3.Bursa Announcements
One should definitely visit www.BursaMalaysia.com for daily announcement updates on companies in which he/she holds a share. Major announcements like dividend announcement, successful bid of a project and big joint-ventures should definitely be the focus, as it will most likely move the share price upwards. Otherwise, one should also pay attention to insider buying and selling announcements. Major shareholders must "announce" if they buy or sell shares of the company, and this can be an indicator to investors out there if the company director or major shareholder is accumulating or disposing their shares. This in turn should be a decisive factor in dumping or buying the shares of the target company. One should be wary that announcements can be delayed, and thus might not reflect the full picture of the situation. Price movement of the stock should be a better indicator of things to come. One should accept price movements as "live" news instead.
4. Company Financials
Company financials are always available for download at the Bursa Malaysia website or the individual company website, unless unavailable for specific reasons. One can access such information by downloading the annual report, or quarterly reports. The "latest" it is, the better.
One should always look at the "Group" category as it represents the whole listed entity/company.
You want a fancy lingo? Just mention Fundamental Analysis and your broker might suddenly give you a little respect. Perhaps your friends too. Well, there's actually nothing much to it. Fundamental analysis in my case, covers the following:
1. News
2. Analyst Reports
3. Bursa announcements (includes major announcements, dividends, insider trade)
4. Company Financials
5. Company Fundamentals
1. News
Fundamental analysis can be as simple as whipping out the business section of your newspaper and reading up. The first and most important skill is to be able to identify trends.
Trends in news appear right before there is action in the stock (i.e. price movement). Usually, favourable news would move the stock price upwards, unfavourable news would move the stock downwards.
It might be good to have a look at the stock, and consider buying it if news keep pushing articles or write-ups about a particular company.
However, it is wise to first make a general study on your company before proceed on buying any of its shares. This will be explained in a little while.
2. Analyst Reports
There should be no shortage of analyst reports of companies you "ought" to buy. Often, these reports are issued with a target price for the certain stock. It is advised that one should not "follow" the target price closely as often these are just predictions on an Excel sheet. Analysts can "predict" earnings but real earnings are determined by how much the company's "salesmen" bring in every quarter. Thus, sales projections are only meant to sound fancy. One should definitely pay attention to the management's strength in managing the company.
3.Bursa Announcements
One should definitely visit www.BursaMalaysia.com for daily announcement updates on companies in which he/she holds a share. Major announcements like dividend announcement, successful bid of a project and big joint-ventures should definitely be the focus, as it will most likely move the share price upwards. Otherwise, one should also pay attention to insider buying and selling announcements. Major shareholders must "announce" if they buy or sell shares of the company, and this can be an indicator to investors out there if the company director or major shareholder is accumulating or disposing their shares. This in turn should be a decisive factor in dumping or buying the shares of the target company. One should be wary that announcements can be delayed, and thus might not reflect the full picture of the situation. Price movement of the stock should be a better indicator of things to come. One should accept price movements as "live" news instead.
4. Company Financials
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| Income Statement: Shows Profit or Loss of the Company [click to enlarge] |
One should always look at the "Group" category as it represents the whole listed entity/company.
"Gross Profit" is a representation of the profit made after selling whatever service or product.
After deducting various costs and expenses, we will arrive at the "Net Profit".
Net Profit tells if the company is making a profit or a loss. By comparing between profits of 2012 and 2011, an investor can tell if the company's profits are increasing or decreasing, or perhaps remained the same.
Increasing profits shows that the company probably has a brighter future, while a loss shows that the company is in a bad shape, while stagnant profits probably shows that the company does not have much growth potential.
Earnings per share indicates the earnings made by each share issued by the company. This is a good indicator to tell investors if the company is indeed making enough money to reward its investors. Why is it important?
A good example would be as follows.
Situation 1
Company A earns RM10 million in net profits that year but it has 100 million shares. This indicates that each share has earned RM0.10
Situation 2
Company B earns RM10 million in net profits that year but it has 50 million shares. This indicates that each share has earned RM0.20
In your opinion, which company would you be investing in? Obviously it is Company B!
By deducting "Total Liabilities" from "Total Assets" one can easily tell if the company has a healthy balance sheet. It is only logical that a company is in a healthy position if its Assets (machinery, building, stock) can be sold-off to pay its Liabilities (money owed to creditors)
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| Balance Sheet: Shows the position of the company's assets/liabilities [click to enlarge] |
5. Company Fundamentals
This is the final and most important area of fundamental analysis. One has to simply adopt a method of logic to improve their skills in analyzing company fundamentals. It requires the investor to at least grasp the current economic and world situation, and being able to relate it to the company he/she wants to invest in. One has to be well-read, aware of latest news and technological developments, as well as political situations. One also have to be alert to movements of prices of raw materials and supply demand factors of the market for the goods or services the company is offering.
Example 1:
Say you plan to invest in a hard disk manufacturer. You understand that currently the world is in short supply of hard disks due to the flood in Thailand (who happens to be one of the major manufacturers). Realizing you bought a local company that is involved in such a business. This shows you understand the company's fundamentals very well.
Example 2:
Say you found out that CPO (Crude Palm Oil) prices have hit an all-time low, and is possible that it would rebound soon enough. After checking the prices of local Palm Oil producers you also realized that Technical analysis indicates a good buying opportunity. When both boxes check, you decided to invest in the company you have set your eyes upon.
In summary, one has to be able to relate to global situations, and find opportunities. This is as I mentioned, the most logical part of Fundamental analysis.
Say you found out that CPO (Crude Palm Oil) prices have hit an all-time low, and is possible that it would rebound soon enough. After checking the prices of local Palm Oil producers you also realized that Technical analysis indicates a good buying opportunity. When both boxes check, you decided to invest in the company you have set your eyes upon.
In summary, one has to be able to relate to global situations, and find opportunities. This is as I mentioned, the most logical part of Fundamental analysis.
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