Why Fundamental Analysis is Done

Fundamental analysis is an approach to determine what should to be the price of a stock or intrinsic value which can be determined by various methods and basic assumption of fundamental analysis is that market price and intrinsic value of stock can differ from time to time and comparing both of them so as to decide whether the stock is under priced or overpriced.

A stock is said to be under priced if its current market price is below the intrinsic value and hence it should be bought while, a stock is said to be overpriced if its current market value is above the intrinsic value and hence it should be sold. So end objective of fundamental analysis is not to make speculative profits rather is to stay away from the risk of buying an overpriced stock and selling an under priced stock.

From the above one can see that person doing fundamental analysis enter the market with a long term view and not for short term because in short term price of stock can differ from its intrinsic value but eventually over a period of time it will be equal to intrinsic value and hence investor will be rewarded from buying an under priced stock.

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