The fundamental analysis allow for selection of securities of different sectors of the economy that appear to offer profitable opportunities.
The objective of fundamental security analysis is to evaluate the “intrinsic value” of a security. The intrinsic value is the true economic worth of a financial asset. According to fundamentalist the intrinsic value of a security is equal to the present value of the future stream of income discounted at an appropriate risk related rate of interest. If the current market price is less then the intrinsic value then the security is said to the under priced and vice versa.
To assess the future stream of income of a security the fundamentalists will have to analyse the factors on which earning potential of the firm depends. These factors include state of economy, economic growth, monetary policies, social and political environment, firm’s capabilities, profitability, etc.
The total analysis of the investment environment can be grouped into the following three types viz.
a. Economy Analysis.
b. Industry Analysis.
c. Company Analysis.
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