A common question people ask about a companys prospects is, what are its fundamentals? This is a valid question, but what does it really mean? It would behoove investors to fully understand what fundamental analysis is in order to improve their investing skills.

Fundamental analysis is a method for valuing the basics of a business. Basically it is identifying the intrinsic or fundamental value of a company, and buying or selling its stock based on that information. Investors looking at the fundamentals of a stock would typically look at things like earnings, cash flow, competitive position, and revenues. This is in stark contrast to technical analysis, which deals with the trading and price history of a stock in order to predict future price movements. Very often, there is disdain from the diehard followers of each method for the other. However, the two can be used to complement each other effectively.

Famous investors like Warren Buffett have made a name and fortune based on fundamental investing. Studying his methodologies will teach you everything you need to know about fundamental investing. He looks for companies that are stable, cash producing businesses that are trading below their intrinsic value.

Buffett looks at such measures as return on equity (ROE), debt levels, competitive position, the potential for recurring revenue streams, stability, and most importantly, valuation relative to its intrinsic value. After digging through all of the fundamentals of a company, he will buy if it is trading at least 25% lower than his calculated intrinsic value.

Clearly, fundamental investing requires a lot of work and research. One must be familiar and proficient with a myriad of financial ratios as well as security valuation. However, this diligence can be handsomely rewarded in the form of becoming a better stock picker and identifying companies that are neglected by the stock market. At the very least, becoming familiar with fundamental investing will allow you to become a more educated investor, which always pays dividends in the long run.