Fundamental Analysis

Fundamental Analysis is a conservative and non-speculative approach based on the "Fundamentals". A fundamentalist is not swept by what is happening in Dalal street as he looks at a three dimensional analysis.

The Economy

The Industry

The Company

All the above three dimensions will have to be weighed together and not in exclusion of each other. In this section we would give you a brief glimpse of each of these factors for an easy digestion

The Economy Analysis

In the table below are some economic indicators and their possible impact on the stock market are given in a nut shell.

	Economic indicators	Impact on the stock market
1.	GNP -Growth -Decline	-Favourable -Unfavourable
2.	Price Conditions - Stable - Inflation	-Favourable -Unfavourable
3.	Economy - Boom - Recession	-Favourable -Unfavourable
4.	Housing Construction Activity - Increase in activity - Decrease in Activity	-Favourable -Unfavourable
5.	Employment - Increase - Decrease	-Favourable -Unfavourable
6.	Accumulation of Inventories	- Favourable under inflation - Unfavourable under deflation
7.	Personal Disposable Income - Increase - Decrease	-Favourable -Unfavourable
8.	Personal Savings	- Favourable under inflation - Unfavourable under deflation
9.	Interest Rates - low - high	-Favourable -Unfavourable
10.	Balance of trade - Positive - Negative	-Favourable -Unfavourable
11.	Strength of the Rupee in Forex market - Strong - Weak	-Favourable -Unfavourable
12.	Corporate Taxation (Direct & Indirect - Low - High	-Favourable -Unfavourable

The Industry Analysis
Every industry has to go through a life cycle with four distinct phases
i) Pioneering Stage
ii) Expansion (growth) Stage
iii) Stagnation (mature) Stage
iv) Decline Stage
These phases are dynamic for each industry. You as an investor is advised to invest in an industry that is either in a pioneering stage or in its expansion (growth) stage. Its advisable to quickly get out of industries which are in the stagnation stage prior to its lapse into the decline stage. The particular phase or stage of an industry can be determined in terms of sales, profitability and their growth rates amongst other factors.
The Company Analysis
There may be situations were the industry is very attractive but a few companies within it might not be doing all that well; similarly there may be one or two companies which may be doing exceedingly well while the rest of the companies in the industry might be in doldrums. You as an investor will have to consider both the financial and non-financial aspects so as to form a qualitative impression about a company. Some of the factors are
History of the company and line of business
Product portfolio's strength
Market Share
Top Management
Intrinsic Values like Patents and trademarks held
Foreign Collaboration, its need and availability for future
Quality of competition in the market, present and future
Future business plans and projects
Tags - Like Blue Chips, Market Cap - low, medium and big caps
Level of trading of the company's listed scripts
EPS, its growth and rating vis-à-vis other companies in the industry.
P/E ratio
Growth in sales, dividend and bottom line

Value, Growth and Income

Growth, Value, Income and GARP are one of the most rational ways of stock analysis. A brief on each of them is given here for your understanding.
Growth Stocks
The task here is to buy stock in companies whose potential for growth in sales and earnings is excellent. Companies growing faster than the rest of the stocks in the market or faster than other stocks in the same industry are the target i.e the Growth Stocks. These companies usually pay little or no dividends, since they prefer to reinvest their profits in their business. Individuals who invest in growth stocks should make up their portfolio with established, well-managed companies that can be held onto for many, many years. Companies like HLL, Nestle, Infosys, Wipro have demonstrated great growth over the years, and are the cornerstones of many portfolios. Most investment clubs stick to growth stocks, too.
Value Stocks
The task here is to look for stocks that have been overlooked by other investors and that which may have a "hidden value." These companies may have been beaten down in price because of some bad event, or may be in an industry that's looked down upon by most investors. However, even a company that has seen its stock price decline still has assets to its name-buildings, real estate, inventories, subsidiaries, and so on. Many of these assets still have value, yet that value may not be reflected in the stock's price. Value investors look to buy stocks that are undervalued, and then hold those stocks until the rest of the market (hopefully!) realizes the real value of the company's assets. The value investors tend to purchase a company's stock usually based on relationships between the current market price of the company and certain business fundamentals. They like P/E ratio being below a certain absolute limit; dividend yields above a certain absolute limit;
Total sales at a certain level relative to the company's market capitalization, or market value. Templeton Mutual funds are one of the major practitioners of this strategy.
Growth is often discussed in opposition to value, but sometimes the lines between the two approaches become quite fuzzy in practice.
Income.
Stocks are widely purchased by people who expect the shares to increase in value but there are still many people who buy stocks primarily because of the stream of dividends they generate. Called income investors, these individuals often entirely forego companies whose shares have the possibility of capital appreciation for high-yielding dividend-paying companies in slow-growth industries.

Keep investing, panic not on your existing stocks

Here's the best tip we can give you if the volatility in the market has spooked you or if you had seen a large profit wash away in the falling market: ignore your stocks right now and keep your investing attention to something else.
Focus all your efforts and time on the company your stock represents. That's because there are really two elements at work when investing: the stock, which is part of the stock market, and the company, something the stock is supposed to represent. But the company works in a different universe from the stock market, involved more in the real world of profits and losses rather than the emotional tide of fear and greed, the two major forces behind the stock market. With the uncertainty prevailing in the market, fear is rampant and some of it is justified, but there are lots of good companies that might be hammered by that emotion. That's why you'll do better if you research your companies in depth rather than trying to figure out if the morning sell off is the beginning of the end or just a hick up on the road to true wealth. But let's say you've done all your numbers, and everything looks great. You've checked for the latest news and you still can't tell why your stock is down. Then you might want to call the company directly and ask for the Investor Relations department. Don't expect the investor relations person to tell you any secrets or unpublished information but you can ask a few questions and get a better feeling about the company:
1. Why is the stock down so dramatically? Are there rumours the company has heard?
If so, what is the company's response to them.
2. Is there anything the company can say about the stock being down?
3. Are the officers of the firm buying or selling the stock?
4. Is the company buying its own shares right now?
You will hence get a sense of how the company is responding to its stock being down, and maybe hear about news that has just been published but you haven't read. Then, when you've done all you can to determine that the company in which you've invested is indeed doing everything well, you can ignore the stock and be assured that this too shall pass. If you determine that the stock is down for a good reason and seems to be going lower, then you can sell it and move on to another company. In either case, you can make a decision based on the company and not the stock.