What is Fundamental Analysis?
Fundamental analysis is one of the most important methods investors use to evaluate stocks. Instead of focusing on price charts, it studies the financial health and real value of a company. Investors analyze earnings, balance sheets, and valuation ratios to determine whether a stock is undervalued or overpriced.
Long-term investors such as Warren Buffett use fundamental analysis to find companies with strong business models, stable earnings, and growth potential.
Why Fundamental Analysis Matters
The stock price of a company moves based on expectations about its future performance. Fundamental analysis helps investors understand:
- How profitable the company is
- How much debt the company has
- Whether the stock is cheap or expensive
- The future growth potential of the business
By studying these factors, investors try to find stocks that are trading below their intrinsic value.
1. Earnings – The Heart of a Business
Earnings represent the profit a company makes after all expenses. Strong and growing earnings usually indicate a healthy business.
Key Earnings Metrics
- Revenue – Total income generated by the company
- Net Profit – Profit after expenses
- EPS (Earnings Per Share) – Profit divided by total shares
Investors prefer companies with consistent earnings growth. If profits increase year after year, it signals a strong business model.
2. P/E Ratio – Measuring Stock Valuation
The Price-to-Earnings (P/E) ratio helps investors determine whether a stock is cheap or expensive.
Formula: P/E Ratio = Stock Price ÷ Earnings Per Share
How to Interpret P/E
- Low P/E → Stock may be undervalued
- High P/E → Investors expect strong future growth
- Compare P/E with other companies in the same industry
For example, technology companies often have higher P/E ratios because investors expect faster growth.
3. Balance Sheet – Financial Health of a Company
The balance sheet shows what a company owns and what it owes. It gives investors a snapshot of the company’s financial stability.
Balance Sheet Components
- Assets – Everything the company owns (cash, property, inventory)
- Liabilities – Debts and obligations
- Equity – Shareholders’ ownership in the company
A strong company usually has:
- Low debt
- High cash reserves
- Growing assets
Week 2 – Chart & Technical Analysis
Complete Guide to Candlestick Charts
While fundamental analysis focuses on the company’s business, technical analysis focuses on price movement and market psychology. One of the most popular tools is the candlestick chart.
What Candlesticks Show
A candlestick represents price movement during a specific time period such as 1 minute, 5 minutes, 1 hour, or 1 day.
- Opening price
- Closing price
- Highest price
- Lowest price
These four values create a candlestick shape.
Understanding Body and Wicks
Each candlestick has two main parts:
- Body – The distance between opening and closing price
- Wicks (Shadows) – The highest and lowest price levels
Different shapes tell traders about buying or selling pressure.
- Long green candle → Strong buying
- Long red candle → Strong selling
- Long wicks → Market indecision
Market Psychology Behind Candles
Candlestick patterns represent the emotions of traders:
- Fear
- Greed
- Uncertainty
- Momentum
For example, a strong bullish candle means buyers dominated the market, while a bearish candle shows sellers were stronger.
Professional traders combine candlestick patterns with indicators like RSI, MACD, and support/resistance to make better trading decisions.
Final Thoughts
Successful investors usually combine both methods:
- Fundamental Analysis to choose strong companies
- Technical Analysis to find the best entry and exit points
Learning these two skills together can significantly improve your decision-making in the stock market.
Educational content only – not financial advice.
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