Fundamental analysis ignores the squiggles on the chart and asks one question: what is this business actually worth? Then it compares that to the price.
Fundamental analysis values a company by its financials and prospects, then compares that value to the market price. If the business is worth more than its price, it may be undervalued; if less, overvalued. Where technical analysis studies price patterns, fundamentals study the company behind the ticker.
The starting point is profit. Revenue is total sales; net income is what's left after costs; and earnings per share (EPS) divides that profit across all shares. Rising, durable earnings are what ultimately drive a stock higher over years.
The price-to-earnings (P/E) ratio divides the share price by EPS. It roughly says how many dollars investors pay for each dollar of annual profit. A high P/E implies high growth expectations; a low P/E can mean a bargain — or a troubled business. P/E is most useful when comparing similar companies in the same industry.
Price vs value: the whole game is buying value for less than it's worth. “Price is what you pay; value is what you get.”
Fundamentals tell you what to buy but not when — a cheap stock can stay cheap for years. Estimates rely on assumptions about the future, which can be wrong. Many long-term investors pair fundamentals (to choose) with a dash of technicals (to time).
Try it risk-free: Compare tickers across sectors and decide which look like the better value in the stock market simulator with play money — no sign-up, no real risk.
Not advice: educational content only. For authoritative basics see the SEC at investor.gov.
Related: technical analysis basics, how to pick stocks, and what is market cap.
It is valuing a company by its financials and prospects — revenue, earnings, debt, cash flow and competitive position — then comparing that value to the market price to judge whether it is cheap or expensive.
The price-to-earnings ratio divides the share price by earnings per share. It shows how much investors pay per dollar of annual profit and is most useful when comparing similar companies.
Earnings per share is a company's net profit divided by its number of shares. Growing, durable EPS is a key driver of a stock's long-term value.
A moat is a durable competitive advantage — such as a strong brand, network effects or scale — that protects a company's future profits from rivals.