Get to know Fundamental Analysis in Stock Trading

In the previous article, we have learned the ins and outs of fundamental analysis in trading . This time we will be more specific in studying fundamental analysis, especially in the stock trading business. In the previous article, it was explained that fundamental analysis can basically be used in any type of trading. Both Forex , Crypto, Stocks and Commodity Futures Assets. The difference usually lies in the factors and what must be analyzed in their respective fundamentals.

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This time we will both discuss what fundamental analysis is in stock trading. So, for you novice stock traders who are curious to learn about fundamental analysis in stock trading, check out the following article!

What is Stock Fundamental Analysis?

In terms of stocks, fundamental analysis is an analysis based on the condition of a company, economic conditions and related industries. Fundamental analysis generally uses company indicators listed in the company's financial reports such as Price to Earning Ratio (P/E), ROE (Return to Equity) , and others. The world's leading investor, Warren Buffet, believes in fundamental analysis in making investments. Fundamental analysis is often used by long-term investors such as Warren Buffet to screen stocks that fall into the good category.

Apart from economic and financial factors, other important points in fundamental analysis are the effectiveness of company management and industry competition. This is then used as a benchmark to determine the performance of a company in the future. These indicators then determine whether the stock price will go up or down. When conducting a fundamental analysis, investors need to conduct a top-down analysis, namely an analysis with an inclusive logic starting from the global economic situation broadly and narrowly to an analysis of one company or one particular issuer company.

How to Fundamental Analysis of Stock Trading

The most frequently used method of fundamental stock analysis is using the Top Down Approach . Fundamental analysis of stocks is a method that takes into account the economic condition of a company. Therefore, the approach used also involves the fundamental conditions and industrial sector of the company. The following factors are analyzed in the fundamental analysis of stocks:

Company Macro Conditions

This condition is related to government regulations where the company is located. This is closely related to what policies are set by the government. One of them is interest rates. If interest rates rise, most investors prefer to save their money in banks rather than stocks. This will certainly affect the pace of the company's business wheels. Conversely, if interest rates are low, investors tend to choose stocks as a way to gain business profits.

Sector and industry conditions

It is undeniable that the condition of the industry is a crucial thing that affects high and low stock prices. If there are things that happen in the related industrial sector, such as price increases, then the value of the industry's shares will also increase. One example occurred in the case of mining stock prices which experienced a rapid increase when world oil prices skyrocketed in 2007. This caused oil and coal stock prices to also increase sharply. Conversely, if oil prices fall, then the value of mining stocks will also be sluggish.

Fundamentals of a Company

Company fundamentals are related to matters relating to the company itself. Examples include company performance related to the effectiveness of company management, company performance from year to year, financial and internal conditions within the company. Apart from that, you also need to pay attention to whether the company has experienced problems such as scandals, problems with the government and so on. These factors also determine the share value of a company.

Things To Look For In Stock Fundamental Analysis

Choose a company with a good and solid reputation

Try to find companies with good performance and performance. This can be proven by the company's reputation. You can find out if a company has a good reputation by reading various articles about the company on the internet or social media. Apart from that, you also conduct a financial audit by reading the financial reports issued by the company to find out whether the company is in a stable financial condition or not.

Check company operating license & share legality

Each country enforces an operating license for all companies operating in the country where the company is located. Therefore having an operating license is very important for the security of the shares you have. Companies that do not have official licenses will have the possibility of having problems with the government. As a result, the worst possibility is forced closure to confiscation of assets by the government. This of course will also result in losses for investors who invest shares in these illegal companies.

Know the appropriate stock price benchmark

The goal of fundamental analysis is not only to choose a good company, but also to buy the company's stock at a good price. We want to buy shares whose price is selling below the company's value. To be able to determine stock prices, good or bad, cheap or expensive, you need a price reference. So, don't just buy it or just follow what people say, because you already have a reference for what the appropriate stock price is.

Price reference is important when the market is rocking and you have to decide to buy or sell the stock. If you have a solid price reference, you can more easily determine whether to buy, sell or do nothing. If you don't have a reference, you can be very easily influenced by market movements, which may be wrong and not in accordance with the condition of the company's shares. Buy to buy, sell to sell, while you should do the opposite.

How to determine the reference price?

There are two types of valuation techniques , namely relative valuation and intrinsic valuation . The easiest is to do a relative valuation , which is to compare the company's shares with the shares of other similar companies.

Margin of Safety (MOS)

This term was introduced by Benjamin Graham in his famous book, The Intelligent Investor . In essence, when making a prediction, you must create a buffer to anticipate future uncertainties. However, when making price predictions or references, we are predicting future events, where there are many influencing and interrelated factors.

Therefore, you need to provide MOS for the price predictions you make. For example, if the reference price that you calculated is IDR 5,000 based on fundamental analysis, then your target is not IDR 5,000 but 30% to 40% of that price, namely IDR 3,500 to 3,000.

Understand financial reports

One of the things we can use as a benchmark in determining the company's performance is the company's financial condition. Financial health is one of the determinants of company quality in fundamental analysis. Therefore, you must understand and understand the company's report. That means you also have to understand how to read and conclude data from the company's financial reports.

There are several fundamental ratio indicators that are commonly used as analytical techniques to evaluate companies based on financial statement analysis, namely:

ROE Return on Equity . How much return , the company's profit, can be generated compared to equity or capital deposited by shareholders. The higher the better.

EPS Earning per Share . Profit per share generated by the company. The higher the better. EPS is an important factor in determining PER to determine stock price valuations.

Assets and Liabilities . How many assets does the company own and are these assets productive enough to generate profits for the company, as well as how does the company finance the ownership of these assets, whether with large bank loans (not good) or mostly with its own capital (better) or by borrowing from supplier (also good).

Bank debt. How big is the company's debt to the bank owned by the company ( DER Debt Equity Ratio debt ratio ) and is the company able to pay debt interest and not burden the company's finances.

Cash Flow Analysis . This analysis shows the company's ability to generate cash, which is the lifeblood of the business, which should be generated from the company's operations and profits and not from debt or capital injections.

Studying financial reports, dissecting fundamental ratio analysis, is not an easy matter. To be able to master financial reports with qualifications, you need to understand the company's business.

Learn how to properly distribute company dividends

Dividend is a distribution of profits given by the company to shareholders which is approved through the General Meeting of Shareholders (GMS). In addition to financial health, dividend payments are an indication that the company is healthy and has strong cash flow . Companies record profits, but do not necessarily have a healthy cash flow . It could be a big profit but actually there is no real cash .

Dividends are proof that the company is profitable, there is profit, and it is real because it can be paid in cash to shareholders. Poor company performance is unlikely to pay dividends, because profits will be reused to improve company performance.

Look for sources of information that are truly valid

In fundamental analysis, there is a lot of scattered information everywhere. Both from the internet, newspapers and direct word of mouth. As a smart trader, you have to be careful with what news you receive. The problem is, on the stock market, many players or investors make investment decisions based on rumours. Not a few are driven by daily issues on the stock exchange floor every day, regardless of whether the stock's performance is good or not.

One of the things you can do is get information from the company's official website. You can also visit the company's official social media to find out what campaigns the company has created. One other option, you can also visit the Indonesia Stock Exchange website (www.idx.co.id) . This site provides comprehensive and updated company information.

Stay patient and don't be greedy!

When you have chosen the right and solid company, the benefits will come to you automatically. Therefore it takes patience to achieve more profits. As explained above, fundamental analysis is an analysis that is suitable for use in long-term investments. Besides that, don't let you become greedy and ignore the strategy even though you have already made a profit. Still, you can never predict 100% accurately what will happen in the future, therefore a trader should not feel greedy if he makes a profit.

Prepare Mentally

Previously discussed abouttips that are done before trading by beginners. In the article, it has been explained, the first thing you have to prepare before trading is to prepare your mind and body. This is important because in the world of stock trading or investment, unexpected things can happen. A beginner can get very big profits (beginer's luck) so that it makes him greedy and greedy so he doesn't care about financial planning in trading. As a result, if at any time there is an unforeseen event that causes the stock price to drop, the loss will be unstoppable.

This is the importance of mental and mind set before starting trading . It should be noted, losses can come to anyone and are not limited to just one type of business. Losses can arise in any business sector. Therefore, careful business planning and proper risk management are needed to reduce the amount of losses generated.

Conclusion Stock Fundamental Analysis

Analysis in trading is very necessary, not only technical analysis, fundamental analysis is also very important. Fundamental analysis focuses on matters relating to the prediction of the company's performance in the future. This relates to financial conditions, analysis of the company's performance in previous years, the company's reputation in the eyes of society and so on. Besides that, you also have to be smart about reading company profiles, especially operating permits and so on.