Essentials of Fundamental Analysis
Fundamental analysis involves using the financial and related data of a firm to infer stock value and forecast future stock price movements. This analysis focuses on assessment of a firm’s activities and growth prospects, the markets in which it competes, and the overall economic environment. Basically, fundamental analysis encompasses studying everything that can affect the underlying financial instrument value (stock), including macroeconomic factors: for instance, overall economy fluctuations and industry conditions and company-specific factors like financial conditions and management.
The fundamental analysts and experts appeal to the economic intuition behind financial statement analysis. In fact, the global investigation of the financial markets results has proven that there is an economic justification for analysts and investors to rely upon many of the specific fundamental rules identified when assessing financial instruments performance in the future.
Definition of ‘Fundamental Analysis’
Have you ever thought about a method that would provide you with all necessary tools to evaluate an underlying financial instrument? The concept of fundamental analysis will present any trader with all the clues used to explore and evaluate a security and measure its intrinsic value. This becomes especially easy when you start examining and investigating economic and financial statistics, as well as other qualitative and quantitative notions. Fundamental analysts strive to study all necessary data that may affect the value of a security, focusing on macroeconomic factors and company-specific features.
When applying fundamental analysis expertise investors/market analysts aim to achieve a value that may be juxtaposed with the present price of a security. As a result, the traders will know precisely whether a security is presently under priced or overpriced and what are the consequences and future implementations of the trading process.
This allows an investor to make his opinion whether to buy or sell the security (under priced = buy, overpriced = sell or short). Fundamental analysis is especially beneficial when applying it to long-term trades (this decision is taken based on appropriate long-term trends). Fundamental analysis focuses on providing the traders with all necessary skills to detect and use long-term economic, political, geopolitical, demographic, technological or consumer trends.
Fundamental Analysis in Function
How do fundamental analysts act? What are the essentials and benefits of their investigation? Basically, fundamental analysts explore and interpret national statistical data and economic factors. Fundamental analysis highlights the following crucial components:
- Fluctuations in interest rates
- Employment reports
- Latest inflation
One of the most valuable tools that will assist you with pursuing with your own analysis is Economic calendar. It will provide you with economic releases that typically have a significant effect on the value of a country’s currency, relative to other currencies. Therefore, it is beneficial to follow the clue events mentioned in the economic calendar (that is usually provided by your preferable broker).
The fundamental analysis strategy is found to be extremely useful when predicting cumulative stock returns.
Key Points of Fundamental Analysis are:
- Interest Rates
- Economic Growth and Trade
- Geopolitical Events and Natural Disasters
- Commodity and Stock Prices