With all the stocks in the London Stock Exchange, how does one make a choice on which ones to buy? Other than guessing that a particular stock is good, financial analysts rely heavily on fundamental analysis. Fundamental analysis involves using the financial statements as well as the market economic outlook to make decisions on the best stocks to buy.
Fundamental analysis will involve two parts. The first part is looking at the economic fundamental data to figure out which stocks are likely to perform well in a particular market. For example, if an economy is going through a credit crunch, financial companies may not be the best choice. The pure fundamental stock trader will look at a country’s economic data like the GDP, GNP, unemployment reports etc.
When one is comfortable with the economy, then fundamental analysis is applied to particular companies. The goal of fundamental analysis in a company is to determine if a company is making any profits and if these profits will continue in the future. Companies in the UK are required to report earnings regularly and a good investor will rely on these data to make an informed decision.
Investors depend on various financial tools to determine the past, current and future profitability of a company to make investment decisions. Good fundamental analysts are able to figure out the value of any company as long as the financial statements given are accurate. To determine the accuracy of such statements, investors rely on independent auditor reports, which are meant to guarantee the accuracy of financial statements.
Some of the important financial statements that investors rely on include balance sheets, cash flow statements, income statements, and profit and loss statements.
A balance sheet is simply a “snapshot” of a company’s financial condition at a point in time. Using a balance sheet, an investor is able to know the relationship between a company’s assets, liability and equity. On one side of a balance sheet, the investor will have the assets of a company and on the other side; all the liabilities and equity in a company would be listed.
The income statement in fundamental analysis will have all the information on the revenue, net income and the earnings of the company in a particular period. The income statement’s main purpose is to summarize a firm’s revenues and expenses over an accounting period.
An investor taking the time to learn and understand these and other financial statements will have a great advantage in the choice of good stocks to buy. If it becomes too difficult to learn them, then find a good broker or financial analyst who understands them.