As an investor, one of the most important things you can do is learn how to perform a stock’s fundamental analysis. Fundamental analysis evaluates a stock by looking at economic, social, and political factors affecting its price.
What is fundamental analysis?
Fundamental analysis assesses security by evaluating economic, social, and political factors that may affect its price. By doing this analysis, investors can better understand a company’s actual value and potential future stock price movements.
A fundamental analyst may examine a company’s financial statements to determine its intrinsic value, which includes looking at sales, earnings, assets, liabilities, and cash flow; by doing this, they can get an idea of whether or not a stock is undervalued or overvalued.
Traders should note that fundamental analysis is not just about looking at numbers. You also need to understand how these numbers relate to each other and the overall economic conditions in Hong Kong.
The most critical factors in fundamental analysis
Many different factors go into fundamental analysis, but some of the most important ones are a company’s financial statements, overall economic conditions, social factors, and political factors.
Look at the company’s financial statements
In Hong Kong, there are many different factors you need to consider when doing a fundamental analysis of a stock. For example, you need to look at the company’s financial statements and the overall economic conditions in Hong Kong.
Be aware of social and political factors
You will also need to be aware of social and political factors affecting the stock’s price. For instance, if there is political unrest or uncertainty in Hong Kong, it could hurt the stock market as investors pull out.
Monitor the stock market
Finally, you also need to monitor the stock market itself, which will help you identify any potential trends that could affect the price of the stock you are interested in.
What are some of the critical financial statements?
There are four main financial statements you should look at when doing a fundamental analysis, and these are normally released quarterly over each financial year.
The company’s balance sheet
This statement shows a company’s assets, liabilities, and shareholder equity and can give you an idea of the company’s financial stability and solvency.
The company’s income statement
This statement shows a company’s revenue, expenses, and net income and can give you an idea of the company’s profitability and operating efficiency.
The company’s cash flow statement
This statement shows a company’s cash inflows and outflows. It can give you an idea of the company’s liquidity and its ability to generate cash.
The company’s statement of shareholders’ equity
This statement shows a company’s issued shares, repurchased shares, and outstanding shares. It can give you an idea of the company’s equity position.
Benefits of using fundamental analysis
There are many benefits to using fundamental analysis when making investment decisions. Perhaps the most crucial benefit is that it can help you avoid overpaying for a stock. After all, if you understand what a company is worth, you’re less likely to overpay when its stock price rises.
Another benefit of fundamental analysis is that it can help you diversify your portfolio. By understanding the financials of different companies, you can better identify which stocks are a good fit for your investment goals, which can help you minimise risk and maximise returns.
The risks of using fundamental analysis
Fundamental analysis is not without its risks. The most significant risk is that you can make incorrect assumptions about a company’s financial statements, leading to you making bad investment decisions.
Another risk is that economic conditions can change rapidly, impacting a company’s financial statements, so it’s crucial to constantly monitor the stock market and the overall economic conditions in Hong Kong closely.
Despite these risks, fundamental analysis is still one of the best ways to assess a stock. Doing your homework and constantly monitoring the market can reduce the risks and make more informed investment decisions. Before investing your money in the local stock market, novice traders and new investors are advised to contact a reputable and experienced online broker such as Saxo Hong Kong and trade on a demo account before investing capital.