Fundamental Analysis

If your trading style is long term investment, that is buy and hold or value investing, select your stocks by doing a fundamental analysis of the company.

How do you do it?
Get the answers to these questions.

• What company is it?
• What product do they make or what services do they give?
• Is there growing demand for their products and services?
• Who are their competitors?
• How efficient are they?
• How good is the management?
• What is their share of capital? Is the capital mostly borrowed money or share holders money?
• Are they honest enough to give real numbers in their financial statements?
• Are they spending more than normal for administration and remuneration?
• How healthy is their balance sheet?
• What is their EPS and PE ratio?
• What is their net worth?
• How is the dividend record?
• Is the political condition favorable to the company?
• How does the import/export law affects them?
• Etc; etc; etc;

If you get answers for all these questions, then you are doing fundamental analysis.

Based on the latest information, the answers that you get are conducive and positive, then you may invest in that company. The point is to find a good company which have high return on capital and high earnings yield, and buy them at bargain price.

This point is very humorously simplified in “The Little Book That Beats the Market” written by Joel Greenblatt

I also suggest you to read, “The Intelligent Investor” by Benjamin Graham, Jason Zweig, and Warren E. Buffett

Limitations
Since this process involves huge and varieties data, only big companies can afford it. For a small investor it is not worth the time. By the time you get all the relevant data, it is old and the market has already reacted to it. Either you may buy the analysis from the big analyst companies or give a big margin.