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One of the biggest worries of any stock investor is that they are overpaying for a stock. Unlike grocery items or dishes in a restaurant, stocks do not come with a fixed price tag. You buy a stock based on current market price for the trade. What is the true value of a stock? For example, if you are buying HDFC Bank shares at Rs 2200, are you paying more or less compared to its true value. The answer to such questions can be received if you do fundamental analysis. What is fundamental analysis ? It is a process of looking at a business at the most basic i.e. fundamental financial level. This is done by looking at fundamental indicators. Fundamental analysis examines the key ratios of a business in a way to determine its financial health. So, at the end of the process, you a fair idea of what should be the price of company's stock. This tells you whether your purchase price was more or less. As a thumb rule, always remember that when you buy a stock at its fair value or less than that, you stand to make profits because the market price always is more than fair value.
Fundamental analysis is a method of evaluating the intrinsic value of a stock. This form of analysis combines external events and influences, as well as financial statements and industry trends. Remember the intrinsic value/fair value of a stock does not change everyday. To understand what is that fair value, you should take the help of fundamentals, which are what drives prices up and down. Fundamental analysis uses three sets of data. One, historical data is used to know things were earlier. Two, publicly known information about the company including announcements made by the management, and what others are saying about the company. Three, information that is not known publicly but is useful i.e. instances of how management handles crises, situations etc.