While technical analysis looks at charts to try to identify trends, fundamental analysis looks at real data to evaluate the fair value of a security. In other words, to get a picture of a company’s financial health and how the market values its stock, it takes into consideration data such as a company’s financial statements, balance sheets, future growth, and management. It may also take into account historical records of sales, earnings, assets, and other measures and general reports about the company. The goal is to determine the current worth and, more importantly, how the market values the stock in order to establish whether it’s a good time to buy that stock…or whether it's a stock to be avoided.
To begin building a picture of how the stock is valued, fundamental analysis focuses on areas such as earnings, growth, and value in the market:
• Earnings per share
• Price to earnings ratio
• Projected earnings growth
• Dividend payout ratio
• Dividend yield
• Book value
• Return on equity
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