Fundamental analysis

DEFINITION of Fundamental analysis

Fundamental analysis is a method in which assets can be evaluated on the basis of external influences. As well as financial statements on the asset.

WHAT IT IS IN ESSENCE

Traders use it to make decisions on different assets. And do so by measuring the economic, financial and market conditions that can affect its price.

Fundamental analysis is one of two major methods of asset analysis, with the other being technical analysis.

While technical traders will derive all the information they need to trade from an asset’s charts, fundamental traders look at factors outside of the price movements of the asset itself.

Traders can either use fundamental or technical analysis exclusively or a blend of the two.

Fundamental analysis involves using numerous qualitative and quantitative factors to evaluate an asset. For stocks, that can mean the rating in a company’s earnings report. Such as revenue, EPS, projected growth or profit margins, etc.

For forex traders, it can mean assessing the figures released by central banks that allow insight into the state of a country’s economy.

Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies.

HOW TO USE

As with most analysis, the goal is to derive a forecast and profit from future price movements.

At the company level, it may involve the examination of financial data, management, business concept, and competition.

At the industry level, there might be an examination of supply and demand forces for the products offered.

For the national economy, the fundamental analysis might focus on economic data to assess the present and future growth of the economy.

To forecast future stock prices, fundamental analysis combines economic, industry, and company analysis. In order to derive a stock’s current fair value and forecast future value. If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either overvalued or undervalued.

And the market price will ultimately gravitate towards fair value.

Fundamentalists do not heed the advice of the random walkers and believe that markets are weak-form efficient. By believing that prices do not accurately reflect all available information, fundamental analysts look to capitalize on perceived price discrepancies.