Introduction to Fundamental Analysis - What is Fundamental Analysis
Besides the technical analysis, fundamental analysis is another analysis approach that is used to perform the market analysis. Using the fundamental analysis, you will be able to derive all the information you require to trade from the financial charts.
As a fundamental trader, you need to look at other factors beyond the movement of the prices and the asset itself. You will use the public data to value to evaluate the value of the security or the stock. A good example is that you can check at the external economic factors such as interest rates and the overall economic state.
This article discusses the fundamental analysis, the sources of the information used in the fundamental analysis, the fundamental analysis tools, and the types of fundamental analysis.
The tools used in the Fundamental Analysis
You can implement various tools to perform the fundamental analysis. However, these tools can be categorized into two primary categories, including the bottom-up analysis and the top-down analysis.
If you use the top-down analysis tools, it means that you are taking a broader economic view, beginning with the whole market. After checking the whole market, you proceed down into every sector in an economy, industry, and lastly, into a specific organization.
On the other side, if you use the bottom-up analysis, you will have to start from the particular stock, and after that, you do up to consider all other factors at large that can impact the prices.
In most cases, the fundamentals analysis is used to evaluate the share price. However, it is used across a wide range of classes of assets, including the Forex and the Bonds.
The type of tools that you choose for the fundamental analysis depends on the type of assets that are being traded. Therefore to perform the fundamental analysis, you need to identify the right tools for a specific asset that you are trading. For example, Earn per Share, profit margins, and revenue are used to look at the company figures in the company's earnings report.
The types of Fundamental Analysis
To perform the fundamental analysis, you can perform either the qualitative or the fundamental quantitative analysis.
In the quantitative fundamental analysis approach, you use numbers or figures. You analyze the figures in the provided financial statements and draw a conclusion about the price of the shares. While on the other hand, the qualitative fundamental analysis approach involves the brand values, the organization's financial performance, the decisions of management, and other various factors.
The Sources of the Fundamental Analysis Information
There are various sources of the information to be used in the fundamental analysis include:
⦁ The profit and loss statement
⦁ Balance sheet
⦁ Industry particular news
⦁ The major economic reforms such as the change in the relevant laws
⦁ The particular industry news
⦁ The company's annual reports.
For you to carry out the fundamental analysis, you need to use the following parameters:
⦁ The Earnings per share- you can use the earnings per share to determine the profitability of the stock from the past years' experience. In comparing the company's current earnings per share with the EPS of the previous years, it is possible to determine the company's growth potential.
⦁ The Return on the Assets- these are some of the essential ratios, and it is used to measure the efficacy of the company in terms of making earnings and profits. The return on assets allows us to indulge in the company's effectiveness to earn money in return.
⦁ The Price to Book Ratio is another essential ratio used to compare its market value to its book value. The ratio of the P/B ratio divides the current market share price by the book value, as stated in the financial statement.
The Pros and cons of the Fundamental Analysis
Using the fundamental analysis, you can collect the right and more important information that will help you make rational decisions concerning the position that you are about to take in the market.
One of the fundamental analysis's significant benefits is that it does not incorporate personal biases because its decisions are based on financial data. This is one of the differences it has with the technical analysis.
The fundamental analysis's main aim is to understand the value of a specific asset instead of just creating the exit and entry points. This allows you to have a longer-term view of the financial market.
After you determine the trading asset's numerical value, you can compare it with the current market prices to assess whether the asset is overvalued or is just under-valued. The main of the fundamental analysis is to be able to identify the values of the assets and make corrections.
One of the major drawbacks of the fundamental analysis is that it consumes a lot of time. It needs multiple research analysis areas, which makes the entire fundamental analysis process more complicated and challenging for many traders.
The fundamental analysis requires a very longer-term market view and the results of the fundamental analysis findings are not the best in terms of decision making. All the traders look forward to creating a specific methodology to create an exciting and entering the trades in various short-terms. Instead of fundamental analysis, technical analysis can be better.
In the fundamental analysis, it is very important to consider think of the worst and best-case scenarios. Using the fundamental analysis, you are provided with a more well-rounded market view, and it is possible for the market condition to change depending on various factors such as the negative political and economic factors.
The basic fundamental analysis is essential for long-term investments, charts, and market trends, and it is the secondary source of information. The fundamental analysis is very important for the almost financial expert.
The fundamental analysis is very important because it creates reliable and consistent information. With the help of the fundamental analysis, it is possible to evaluate the security's intrinsic value. One of the standard models used is the discounted cash flow model, a common valuation approach that can be used to determine the organization's intrinsic value.
Student of Technical Analysis