Fundamental Analysis

The basic premise behind fundamental analysis is to concentrate on the long term potential of a company rather than the short term fluctuations of a share price.

You need to weigh up a company's history, its financials, its future prospects, its management and its products to form a view on where its share price is heading in the future.

Fundamental analysis relies on using a number of stock picking criteria.

Digital Look's glossary explains some of these criteria and terms in more detail, and our Stock Selection service provides you with a constantly updated list of stocks that fit certain fundamental criteria.

There are two main approaches to fundamental stock picking:

Top-down

The starting point here is an overall view of the market and the economy. Attractive industry sectors are identified and then companies within those sectors are examined to see which will benefit most from social, economic and political influences.

Bottom-up

An investor starts by identifying an attractive share by assessing individual companies' businesses and operations whichever sector it is in by using specific criteria to value a share.

Generally the top-down approach is used by growth investors, while the bottom-up approach is popular among value investors.

In the next few chapters we go on to explain more about growth and value investing.