In our first guide, Investing for Beginners: Your Path to Financial Freedom, we looked at why money sitting still loses value and at the main things you can invest in: stocks, bonds, ETFs and gold. The next question is harder: how do you decide what to buy, and when?
There is no single answer. People approach the market in different ways, and the first step is knowing which approach fits you.
Investor or trader: two ways to approach the market
| Investor | Trader | |
|---|---|---|
| Time horizon | Years | Days to weeks (sometimes minutes) |
| Main question | Is this a good business at a fair price? | Where is the price likely to move next? |
| Main tools | Fundamental analysis | Technical analysis, news flow |
| Typical activity | Few decisions, held for a long time | Many decisions, frequent buying and selling |
Neither style is the only right one. Many people combine them: they use fundamentals to choose what to own and charts to decide when to act.
Three ways to research a stock
- Fundamental analysis studies the business itself: its revenue, profits, debt and competitive position.
- Technical analysis studies the price chart: trends, support and resistance, momentum indicators.
- News and sentiment analysis studies the events that move prices in the short term: earnings reports, product launches, regulation and interest rates.
This article covers the first one. Technical analysis will be the topic of our next guide.
What is fundamental analysis?
Fundamental analysis is the practice of estimating what a company is really worth, often called its intrinsic value, and comparing that with its current share price.
The idea behind it is simple. In the short run, prices move with emotions and headlines. Over the long run, they tend to follow the company's actual results. A fundamental analyst asks:
- Is the company growing?
- Is it profitable, and are profits rising?
- Can it pay its debts?
- Does it have an advantage that competitors cannot easily copy?
- Is the current price reasonable compared with all of the above?
Part 1: The qualitative side (the story)
Before looking at any number, understand the business.
- Business model: How does the company make money? Who are its customers? Can you explain it in two sentences?
- Competitive advantage (moat): A strong brand, network effects, patents, high switching costs or low production costs. A wide moat helps protect profits over time.
- Management: Do the leaders have a good track record? Do they communicate clearly and keep their promises?
- Industry: Is the industry growing or shrinking? Is it heavily regulated? How strong is the competition?
Part 2: The quantitative side (the numbers)
Public companies in the US publish three main financial statements every quarter.
- Income statement: revenue, costs and profit over a period. It answers: is the company making money?
- Balance sheet: what the company owns (assets), what it owes (liabilities) and the difference (shareholders' equity) on a given date. It answers: how strong is its financial position?
- Cash flow statement: the actual cash coming in and going out. It answers: is the profit real cash, or only an accounting figure?
A company can report a profit and still run out of cash. That is why experienced investors look at all three together.
Key ratios every beginner should know
| Ratio | Formula | What it tells you | Watch out for |
|---|---|---|---|
| P/E (price-to-earnings) | Share price ÷ earnings per share | How much investors pay for $1 of profit | A low P/E is not always cheap; profits may be falling |
| EPS growth | Change in earnings per share over time | Whether profit per share is rising | One-off gains can inflate a single quarter |
| Revenue growth | Change in sales over time | Whether demand for the product is growing | Growth bought with heavy losses |
| Net profit margin | Net profit ÷ revenue | How much of each dollar of sales becomes profit | Compare only within the same industry |
| Debt-to-equity | Total debt ÷ shareholders' equity | How much the company relies on borrowing | High debt is riskier when interest rates are high |
| Free cash flow | Operating cash flow − capital spending | Cash left for growth, dividends or buybacks | Negative free cash flow for many years in a row |
A simple example. Imagine two companies, both trading at $50 per share:
- Company A earns $5 per share, so its P/E is 10.
- Company B earns $1 per share, so its P/E is 50.
Company A looks cheaper. But if Company B's profits grow 40% a year while Company A's shrink, the picture changes. A ratio means little on its own. Compare it with the company's own history, with competitors in the same industry and with its growth rate.
A 5-step checklist to research any stock
- Understand the business. If you cannot explain how it makes money, stop here.
- Check the trend. Look at revenue and profit over the last 3–5 years, not just the last quarter.
- Check financial health. Look at debt levels and whether free cash flow is positive.
- Compare with peers. Put its P/E, margins and growth next to two or three competitors.
- Read the latest news and earnings report. Make sure nothing has changed the story, such as a lawsuit, a new competitor or a lowered forecast.
Where to find the data
- Company filings: US companies file an annual report (10-K) and quarterly reports (10-Q) with the SEC. They are free on SEC EDGAR.
- Earnings releases and calls: published every quarter on each company's investor relations page.
- Financial data tools: many platforms show these ratios in one place. On L.WIN, the screener and stock reports bring key figures and the latest news together, so you spend less time collecting data and more time thinking about it.
Common beginner mistakes
- Buying only because the P/E is low. Sometimes a stock is cheap for a good reason.
- Looking at one quarter. Trends matter more than a single result.
- Ignoring debt. Rising interest rates hit heavily indebted companies hardest.
- Falling in love with a story. A great product does not always mean a great investment at any price.
- Forgetting that the market can stay wrong for a long time. Fundamentals work over years, not days.
Fundamental vs. technical analysis: what comes next
Fundamental analysis helps answer what is worth owning. Technical analysis tries to answer when to buy or sell by studying price behaviour. In our next guide, we will look at trends, support and resistance, moving averages and the RSI, and at how some investors use both methods together.
Key takeaways
- Decide first whether you think like an investor, a trader or a mix of both.
- Fundamental analysis looks at the business: its story, its numbers and its price.
- Read all three financial statements, not just the profit line.
- Never judge a ratio in isolation. Compare it with history, peers and growth.
- Build a simple, repeatable checklist and use it every time.
Ready to put the checklist into practice? Try the L.WIN stock screener and research your first company with the steps above.
This article is for educational purposes only and is not investment advice. Always do your own research and consider your personal situation before making any investment decision.