Who Can Perform Fundamental Analysis?
You don’t have to be a high-powered investor to use fundamental analysis. If you have an interest in finding out more deeply about how companies work, you’re a candidate for learning about fundamental analysis. In fact, knowing how to read, analyze, and take action from information you glean about a company can be helpful for many users, including:
- Stock investors: Those looking to take an ownership stake in a company have a great financial incentive to master fundamental analysis. What they find out about companies may help them to decide when a good time to buy or sell may be.
- Lenders: When you give someone a loan, you want to make sure they have the ability to pay you back. If you lend money to a company, perhaps by buying bonds it issues, you’re more concerned about getting your money back than about making a killing on the investment.
- Mutual fund investors: Even if you don’t pick individual stocks or bonds to invest in, you probably own mutual funds that do. Mutual funds are investments that invest in a basket of individual securities. Using fundamental analysis, you can investigate some of the stocks your mutual funds may own. You might take a look at the top holdings of your mutual fund and question why your mutual fund owns them.
- Employees: Workers may be anxious about the health of their company for several reasons. Using the same techniques an investor would use, you can study your company’s financial resources and roughly estimate how likely it might be to pursue aggressive cost-cutting, like layoffs. Employees who depend on a pension paid by a former employer might also want to study the health of the company and make sure it will stick around.
- Board members: Whether you’re a board member of a large company, your local museum, or your condominium association, understanding the flow of money in and out can make you more valuable. Understanding fundamental analysis will help you be a solid watchdog of the organization’s management by looking at facts, not promises.
- Donors: Even some nonprofit charities disclose their financial standing. Fundamental analysis will help you see where donations are being spent and whether or not money is getting to those in need or being soaked up by the bureaucracy.
- Consumers: When you buy a product or service, you may not think of yourself as investing in a company. Most of the time, you’re not. But sometimes by buying a product you are forming a long-term relationship with a company. Take a car or an insurance product. These types of long-lived assets can attach you to the hip of a company for years. It’s a good idea to know how to analyze a company if you plan on relying on its products for a long time.
Above all, fundamental analysts are good at not getting hoodwinked by companies. That’s not a bad skill to have. You can’t always take the financial statements at face value. Fundamental analysis gives you the tools you’ll need to get to the truth beyond the numbers.
Fundamental analysts spend quite a bit of time looking at companies’ financial statements. But skilled fundamental analysts do more than just pick apart financial statements. After all, if that’s all it was, fundamental analysis would be synonymous with accounting. Fundamental analysts use their findings to make investment decisions.