Learning Path
Personal Finance
This path is ideal for:
- Learning how to make good financial decisions
- Discovering practical ways to better manage money
In this path, you'll learn how to:
- Create a budget and set savings goals.
- Manage debt to build a strong credit history.
- Identify strategies for minimizing taxes.
- Protect yourself and your family with insurance and estate planning.
ursuing Your Goals with Fundamental Analysis
Fundamental analysis is an approach to identifying investment opportunities. Fundamental investors use
financial statements,
economic reports, and
forecasts to examine the key drivers of a company’s current and future potential business activities.
The purpose of fundamental analysis is to find quality investments that are designed to help you pursue your long-term financial goals like retirement, children’s education, or an enhanced lifestyle. This course focuses on applying fundamental analysis to stock investing as part of a diversified portfolio. During this course you’ll find value stocks by using fundamental analysis to identify stocks that appear to be undervalued by the market. Fundamental analysis is also a useful way to evaluate an investment’s unique risks and potential growth. We’ll discuss these approaches in more detail later in this lesson.
Throughout this course, we’ll build a foundation of knowledge you’ll need to understand important concepts in stock investing. Then, we’ll teach you step-by-step processes for using fundamental analysis to build and maintain your own stock investments. By the end of the course, you should be able to:
- Define the role of fundamental analysis in the investment process.
- Define key concepts of value and growth investing.
- Find fundamentally strong stocks with attractive value qualities.
- Calculate a stock’s intrinsic value.
- Identify value stocks’ buy and sell signals, and manage investment risk.
- Maintain current positions and develop appropriate routines.
This first lesson focuses on the role of fundamental analysis in stock investing, along with its benefits and risks. It also provides some basic context around investing that can help you throughout the rest of the course.
Now take a moment to complete this activity and check what you’ve learned so far. Activities like this appear throughout the course. Consider them a study aid. When you test your new knowledge and recall information, you make your learning “stickier.” Reinforcing your learning like this can help prepare you to apply your newly learned skills.
Which statements describe fundamental analysis? Select all that apply.
Incorrect
Fundamental analysis uses financial statements, economic reports, and forecasts to evaluate an investment’s potential. The goal is to select investment opportunities by examining the key drivers of a company’s current and future business activities. Using a stock’s price and volume to help identify trends and distinctive patterns are characteristics of technical analysis.
Investors can use fundamental analysis to evaluate which of the following investment qualities? Select all that apply.
Correct
Fundamental investors examine a stock’s investment potential in three areas: value, growth, and risks. Momentum is related to growth but is commonly used by technical analysts when measuring a stock’s price changes.
Stock Investing Styles
You’ve learned that fundamental analysis plays an important role in selecting stocks in a diversified portfolio. In fact, it can play several roles depending on your financial goal. Some investors use fundamental analysis to search for a type of stock to fill a portfolio need—such as an undervalued stock, or one to generate growth or income.
The analysis process often depends on the investing style you’re employing. We’ll briefly look at three different styles of investing: value, growth, and income. Though this course focuses heavily on value investing, you may incorporate one or all of these styles into your own portfolio.
Let’s briefly describe value and growth investing and why fundamental analysis can be important for each one.
Value investing seeks stocks that have a market price lower than their intrinsic value. Intrinsic value is an estimate of the true worth of an asset based on all available information. By determining how much a company is estimated to be worth, investors can determine how much its stock is actually worth. If the stock’s market value is lower than its intrinsic value, the stock is said to be undervalued. A value investor would consider buying this stock in anticipation of its market value eventually increasing to match its intrinsic value.
If a stock price is higher than its intrinsic value, the stock is said to be overvalued, and investors may be paying more than it’s worth. Over time, investors expect the market to catch up and price these stocks more accurately—i.e., they expect undervalued stocks to rise and overvalued stocks to fall.
Fundamental analysis is helpful in estimating a company’s current intrinsic value and the degree to which its stock is relatively undervalued. Additionally, it can be useful to make relative comparisons between the value of different stocks. An investor using fundamental analysis can do this by examining financial statements, economic reports, and forecasts to come up with their own valuation of the company. The TD Ameritrade website provides numerous tools to help with this analysis, and later in the course we’ll walk through a step-by-step plan for using fundamental analysis to help identify value stocks.
Unlike value investing, growth investing isn’t necessarily looking for stocks that are undervalued. Growth investing seeks stocks with potentially high growth potential. Growth investors use fundamental analysis to help identify future growth in various areas of a stock’s business—such as sales, earnings, or cash. It places more emphasis on a company’s future earnings potential than its current intrinsic value or stock price. For example, growth investors might buy stock in a company that they think will experience higher-than-expected growth over time and profit as the stock price rises accordingly.
Income investing seeks to find stocks that produce regularly increasing income through dividends. Income stocks can have characteristics of both value and growth stocks; however, the analysis process can be quite different.
Income investors often use fundamental analysis to assess the company’s dividend history and consistency, as well as its ability to pay future dividends. Income investing assumes the stock’s price (and future price) is less important than the income it provides over time.
Many investors might apply fundamental analysis to help build growth and income portfolios, but this course will primarily focus on ways to build a value portfolio using fundamental analysis.
A value investor evaluates a company’s current financial situation in order to determine if a stock’s market price is lower than its ________ value.
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