Saturday, July 22, 2006

Why Fundamental Analysis ?

Before I delve into why and how I buy my shares I thought it would be a good idea to give a brief outline of fudamental analysis and why I use it.

Fundamental analysis is using the numbers behind a company rather than the price to determine the value of the company. Whereas Techincal analysis firstly looks at the price and what it has/has not been doing, fundamental analysis focuses on how much money the company made and will it continue to make money in the future.

Well known fundmanetal analysts include Bejamin Graham and Warren Buffett. These people pioneered how to value companies and the importance of getting value.

I have focused on using fundamental analysis with a touch of technical analysis to develop a loose system within which I make my decisions. They are not always based on the same thing ( for example Price Earnings Ratio might be important in one instance and useless in another) but the overall idea is to find a company which is making lots of money and/or will make lots of money in the future and then deciding what price is a good price.

There are many companies on the ASX which are making profits and are forcast to dramatically increase profits but there are not many which we can get at a bargain price.

One thing I hope to do is to add a watchlist of companies which are looking good from a fundamental perspective but are not at a good value. That way if we notice they have fallen to an acceptable level we are ready to grasp the opportunity.

Good Luck

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