What is the importance of fundamental analysis ?

What is the importance of fundamental analysis ?

When you buy a banana from the market, you pay a price that you think is right. If a fruit seller asks you to pay Rs 50 for a banana is that right? In the same way, if a banana is available for 50 paise is that right? You know that one dozen of bananas should cost Rs 40-50. So, per banana cost is about Rs 4. So, if the banana is available at a steep discount or steep premium, there must be valid reasons why the asking price is such. When you go to buy a stock, for example Infosys, you know the current market price is Rs 780 per share. This price is only the market price i.e. some seller must be asking for this rate to sell the Infosys stock.

Your job as a long term investor is to buy the stock at a far lower price than the intrinsic value. So, if the true value of Infosys stock is Rs 900, buying it for Rs 780 is logical. On the other hand, if the true value of Infosys stock is Rs 700, buying it at Rs 780 is not a good deal for you.

Fundamental analysis and various stock fundamental reports tell the investor what is the true value or fair value. Hence, you know whether you are entering a good deal for the buyer or the seller. If the current market price is lower than the fair value, also called intrinsic value, then the company/stock is said to be undervalued. If the current market price is higher than the fair value, then the company/stock is said to be overvalued. In a nutshell, this is the importance of fundamental analysis of a stock.