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Due to speculative nature of stock prices, it is nearly impossible to predict the future
price of
stocks. Stock prices are mainly run by investor perception about companies future
performance
and expected growth. But this assumption about growth of future stock prices is not
scientific.
Technical analysts do a detailed tracking of stock price In order to predict future stock
prices but
again this is not scientific and lot of information is left to assumptions. Fundamental
analysts like
Warren Buffett also estimates future prices of stocks and buy stocks, but the
difference between
Warren Buffett and technical analysts is the word "fundamental".

Relationship between stock price and its fundamentals

Warren Buffett does the stock price estimation on basis of fundamental analysis of
companies
performance. In simple terms you can say Warren Buffett tries to establish a
relationship
between the market price of stock and business performance. But fundamental
analysis of stocks
holds true only for long term horizon. For short term investment goals technical
analysis is more
suitable. When I say long term it means time span of 10-15 years and short term
means less than
3 years. Let me explain you how fundamental analysis is suitable for only long term
investment
goals. When we are linking market price of stocks with companies' performance we
also need to
give time to companies to deliver results.

If we buy stocks today and in next one year we want our value to be doubled then its
not
scientific because stocks are not lotteries. Companies needs time to show results,
suppose a
companies stock is $10 today and its management decided to invest $1million dollar
to expand
and modernize its facilities to increase turnover and profit margin. The duration of the
project is
say 5 years, so till 5 years you cannot assume any substantial appreciation in the
market price of
stocks ($10). But as soon as the project is complete and company begins to increase
its sales and
profitability the same will start reflecting in the market price of stock. But why the
market price
of stocks appreciates after expansion and modernization of business? The answer is
simple,
expansion and modernization of business strengthens the fundamentals of business.
When we
say strengthening of fundamentals we mean increasing the following business
performance
parameters

1. sales,
2. earnings &
3. net worth of business.
Correlate price of stock with companies fundamentals

Here we will try to learn and correlate market price of stocks with company's
fundamentals
performance parameters like sales, earnings and net worth. The objective is to study
the
fundamentals of past five years (say) of a company and try to predict the performance
for next
5/10 years. Each listed company as a rule publishes its annual financial statements
called
Balance Sheet, Profit & Loss Statements & Cash Flow Statements. Details about
sales, earnings
and net worth are available in these financial statements. Fundamental analysis of
stocks means
studying balance sheet, profit and loss accounts, cash flow statements and correlating
the results

with market price of stocks. Financial statements shall be used to compute the
following
performance parameters:

1. Sales / share (SPS)

2. Earnings or net profit / share (EPS)
3. Net worth - depreciation / share (NWPS)

By using the the above performance parameters one can study the behaviour of
market price of stock with every change in sales, earnings & net worth of a company.
Doing a study on financial results of at least last 5 years, one can understand the
pattern of stock price movements. Select a company with the highest market
capitalization; such companies follows a pattern (relating to financial performance) in
a more certain way.

The author is a big enthusiast of the process ofI nvest me nt and aspires to set-up a
highly
successful online business of himself. He is a firm believer in the concept of 'working
for self
can make this world a better place to live'. He has also been heavily influenced by the
theories
and practices of Warren Buffett and would like to practice investment just like his
guru