We always try to predict the fair value of certain assets such as a used car, land, or house, before buying them. The same principle can also be applied to investment in stock. Investors can initially conduct fundamental analysis in order to determine the fair value or price of a stock.

The fair value of a stock is usually compared with its market price. If the stock fair value exceeds its market price, the stock is considered undervalued and worth buying. On the other hand, if the stock fair value is lower than its market price, the stock is considered overvalued and therefore should be sold.

Fundamental analysis assumes that the market may not result in accurate valuation for the oustanding stocks in short term. However, in long term market share price will always adjust to its fair value. Consequently, investors can benefit from the temporary market mispricing.

Investors usually asses and analyze the financial condition of a company in fundamental analysis. The company value is divided by the number of its outstanding shares in order to determine a proportional share value.

Several 'fundamental analysis tools' that are often used by investors to analyze stocks are as follows:

1. Value. The value approach intends to purchase a stock at high discount price of its intrinsic value. Value approach usually use measurement tools such as Price/Earning Ratio (PER), Dividend Yield, Book value per share, Total Sales/market capitalization

2. Growth. Growth approach intends to invest in a company with high high sales and profit growth. This approach analizes the business quality of a company and its growth before investing in the company.

3. Income. Although at the present most investors expect to obtain capital gain in stock investment, many investors expect to receive cash devidend from the their shares. Stocks that fit this criterion are issued by companies in fixed industry with slow growth rate and consistent cash devidend payout.

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