I decided to write this article so that investors (beginners) could learn about how important it is to understand the fundamentals of an asset and what you could expect from such (Expect many examples as explanations in the article so as to provide a clearer understanding).
Basically, fundamental means foundation. To make it easier to understand; it's just like building a house. Without the foundation, it's tough to build the pillars on uneven surfaces; and even we manage to, the pillars will eventually collapse after some time.
The same goes for assets. If there's no fundamental in an asset, nothing can drive the value of it and after some time, it will collapse in the near future as well.
Now, what are the examples of fundamentals in an asset?
It's always been the real application of an asset. Such as stocks, some stocks perform well in the long run than others, mainly because the underlying business of the stock, provides the real demand- to be more precise, the essentials.
Example; Google stock. What drives the stock price to go bullish because of its underlying businesses. Who doesn't use Google? Almost everyone, almost the whole world who utilizes the internet. Now that's fundamental.
Another example; such as Ethereum. Ethereum provides a blockchain or a highway for developers to build their Decentralized Apps (Dapps) upon. Now, with more Dapps built upon the Ethereum ecosystem, more users utilize the blockchain. Thus that's what drives ETH to what it is today. Now that's fundamentals.
I could go on and on with the examples but I hope those 2 examples are clear enough to understand what is fundamental.
Now that we understand a glimpse of what's fundamental, we can use it to make a better decision in investing in such assets in the future. Such as;
You discovered 1 cryptocurrency which is on a bull run. Before you enter, always ask yourself, is there any real application of the crypto? how does the real application works? Will there be huge traffic users utilizing the crypto? What are the developers' plans in the long run and how will they benefit the users? etc.
Or;
You discovered 1 stock which your friend recommended. Ask yourself, how essential are the products to people? are the products following trends or long-term usage? Is the company financially healthy? Is the company good at making sales, managing its assets? Is the company better than its competitors? etc.
All of those examples given are questioning the fundamentals of an asset. But why the need for questioning? So that you can plan out your risk management after understanding the certainty & uncertainty of an asset.
For example; you did research on the fundamentals of an asset. After questioning about the certainties & uncertainties and agreeing to many factors, you decided to enter your position (to buy-in).
Let's say it was going absolutely fine until 1 day, the stock price decides to dip. Should you sell? the answer to it is simple. Go back to why you invest in the asset in the first place.
If you invest in an asset due to its underlying businesses, then you should research the businesses. Are the company's businesses deteriorating? If no, why sell? That means the dip is just temporary or to state, it's just another opportunity to buy in more shares at a bargain. If the answer is yes, then sell because the main fundamental of the asset has weakened.
Another example; you believe the cryptocurrency you just invested in provides the best blockchain and there is a huge amount of Dapps built upon it. Then 1 day, the price dips. Should you sell? Again, go back to the fundamental and ask yourself. Have the dapps moved on to other better blockchains? If no, why sell? If yes, sell and find the next better blockchains.
You see, investors have to understand that assets will both incline and decline in prices every now and then for no reason. Because that's the nature of the investment. Nothing will stay at permanent levels. And doesn't mean an incline of price, means the asset is performing while a decline of price, means the asset is not. That's not how it works. The true or actual performance of an asset will always come down to its fundamentals over time.
To further emphasize; knowing about the fundamentals of an asset also refrains you from such cases as blindly taking hints from the signallers (fake gurus, YouTubers, etc.), making unnecessary mistakes, having FOMO (Fear Of Missing Out), and FUD (Fear, Uncertainty, Doubts). To simply put, it teaches you how to invest correctly, rather than being speculative or gambling. If investors treat investment as gambling, then what's the point of investing, if you can just gamble in a casino or other betting platforms?
Now, I believe I've covered more than enough basic knowledge about fundamentals. Thus, I wish to end the article at this point. I hope readers learn a lot from this article.
