Security Analysis, Fundamental Analysis

Assets with some financial value are called securities.

Characteristics of Securities

  • Securities are tradable and represent a financial value.
  • Securities are fungible.

Classification of Securities

  • Debt Securities: Tradable assets which have clearly defined terms and conditions are called debt securities. Financial instruments sold and purchased between parties with clearly mentioned interest rate, principal amount, maturity date as well as rate of returns are called debt securities.
  • Equity Securities: Financial instruments signifying the ownership of an individual in an organization are called equity securities. An individual buying equities has an ownership in the company’s profits and assets.
  • Derivatives: Derivatives are financial instruments with specific conditions under which payments need to be made between two parties.

The analysis of various tradable financial instruments is called security analysis. Security analysis helps a financial expert or a security analyst to determine the value of assets in a portfolio.

Security analysis is a method which helps to calculate the value of various assets and also find out the effect of various market fluctuations on the value of tradable financial instruments (also called securities).

Classification of Security Analysis

Security Analysis is broadly classified into three categories:

  1. Fundamental Analysis
  2. Technical Analysis
  3. Quantitative Analysis

Fundamental Analysis

One of the tools that investors use to manage their portfolios is fundamental analysis. It is helpful in gathering the right information to make reasoned decisions about how and where to invest. Successful fundamental analysis can build a path to profits by allowing traders to separate companies that are fundamentally strong from those that are fundamentally weak. Fundamental analysis is different than technical analysis, which focuses more on price moves and technical features of a particular stock’s historical performance.

Fundamental analysis refers to a method of analyzing and evaluating equities, though it may also apply to other types of securities. With fundamental analysis, income statements, balance sheets, cash flow and other publicly available documents are used to analyze the financial health of a company. Economic data such as unemployment numbers and interest rates may also be considered. The goal with fundamental analysis is to find companies that are trading at a discount from their true (or “intrinsic”) value and thus may increase in share price when the market recognizes their quality.

The Basics of Fundamental Analysis

Fundamental analysis is an important component of almost any successful trading or investing strategy. All traders should have a basic understanding of how fundamental analysis works.

These are the primary factors to consider when conducting fundamental analysis:

  1. What is the company’s revenue?
  2. Is it growing?
  3. Are they making a profit?
  4. Are they increasing indebtedness or paying off debt?
  5. What are their turnover rates?
  6. Does management take care of employees?

All of this helps define a numerical intrinsic value for the security that can be compared with its current price so as to determine whether or not it is overvalued or undervalued.

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