Buy and sell stocks with KYC [fundamentals]

The importance of Fundamental Analysis cannot be understated while picking a stock for investment. Investors like Warren Buffet, Peter Lynch, George Soros who have made it big in the market by investing have always emphasized the Fundamental Analysis as the first step for picking the stocks.

Today know about those dimensions of Fundamental Analysis whose scope falls outside of the Financial ratios and Financial statements.

What is KYC of a stock?

Though the company performance can be analyzed using fundamentals data like Financial Ratios, Financial Statements, there are few aspects that are not present in these. I have grouped them under the term KYC i.e., Know Your Company.

Knowing Your Company (KYC) is important, but what all come under KYC? Here is a list of factors that need to be considered to know the company fundamentals.

Company’s Business & the Economy

Any company growth is dependent on factors like the type of business it’s into, the Supply Chain Management, demand-supply, etc. combined with the vision of the Management that is taking it forward.

Though the business and the economy cannot exist independently of each other, the nexus can be classified as tightly coupled in some cases and loosely coupled in other cases.

The type of business especially is important, for example, businesses that are cyclical in nature are affected by macroeconomic or systematic changes in the economy and determine the growth and price of the stock ex: automobile, airlines.

On the other hand, defensive stocks can provide consistent dividends and stable earnings irrespective of the stock market as there is a constant demand for their products ex: Technology, Healthcare.

Whichever stocks are chosen for investment, it’s always important to monitor and revisit our investments as per the type of business that we have invested (or) would like to invest in.

Company’s Future prospects

This is another important factor that determines the growth of the stock. In the late 90s and early 2000s, the Information Technology sector was booming all over the world, growing both in terms of demand and supply for IT produces and services. Of course, it still continues to be in demand.

The majority of those who have taken a calculated risk in picking the IT stocks have enjoyed good returns over a period. Choosing the company from the right sector for picking a stock based on a good analysis of its future prospects.

Industrial Revolution 4.0 is the new buzz word. So far the individual streams or sectors have flourished but with the latest advancements, the scope for innovation lies at the confluence of various sectors. For example Data Analytics in E-commerce, Artificial Intelligence in Health Care, Blockchain in Finance sector, IoT in the Electronics industry.

Follow the latest trends and technological advancements that companies are adopting and are investing their capital in, to pick your choice accordingly.

Company’s Competition and the Economic Moat

A business which is a monopoly has a greater scope for growth than the one with a large number of competitors. I am not justifying monopoly, but it is important to estimate the competition and the ability of the business to survive in it.

Economic Moat is a factor that considers the ability of a business to maintain a competitive advantage over its competitors. It involves protecting the company profits and market share from competing firms.

Healthy Competition will help maintain the price equilibrium along with the quality of a product or service in the market. This brings the ethical nature of business into focus.

Choosing a company that considers Economic Moat, which maintains stability, and that upholds market ethics is rewarded in the long run.

Company Management

There were big companies which went awry and there are small companies which became the best in the industry.

Who would’ve imagined that a 150 plus years old Lehmann Brothers Holdings Inc., the fourth-largest investment bank in the US and with around 25000 employees worldwide, would collapse one day?

Google is just 22 years old but crossed $1 Trillion net worth according to Forbes and in that process Larry Page and Sergey Brin’s contribution cannot be understated.

How Satya Nadella has transformed Microsoft into the world’s most valued company is a testimony to this. Look at the credentials of those who are managing the company.

The difference here lies in the management. It is always suggested to prefer an average company with good management rather than a great company with bad management.

Almost always, it is good management that can take all the company’s stakeholders starting from the board to the employees to the investors and the customers, to the places they have never imagined would go to.

Conclusion

It is important to understand the company better from the perspective of Management, Competition it is into, the business environment for the sector, Competitors, etc for investing and in turn get good returns.

This knowledge and information can help in making a rational decision on which stocks to add to your portfolio.

Keep learning and growing. Happy Investing..!!