Fundamental Analysis: A Perfect Tool for Every Market
There are two main types of market analysis. They are fundamental and technical ones. Although fundamental analysis is not a complicated method to predict market moves, there are features you should learn about. An essential feature of fundamental analysis is that it differs in every market. Let’s find out what fundamental analysis is.
Fundamental Analysis: Definition
Fundamental analysis evaluates the intrinsic value of an asset considering macroeconomic and microeconomic factors that have an impact on the price. The main idea of the fundamental analysis is to define whether an asset is undervalued or overvalued. Fundamental analysis is widely used for stocks and currencies.
Fundamental analysis is mostly used for stocks and forex. However, it can be applied to any security from bonds to derivatives.
This method of analysis includes such tools as news, economic events, financial statements, industry trends, etc. depending on the market you analyze. Let’s discuss the differences in more detail.
Fundamental Analysis and Stocks
We will start with the stock analysis. It doesn’t matter if you buy real shares or trade CFD; the fundamental factors that affect the stock price are the same.
Quantitative and Qualitative Factors
The stock fundamental analysis covers a wide range of tools: from a balance sheet and a company’s revenue to something more specific, such as market sentiment or quality of a company’s management.
That’s why all of the tools were separated into two groups: quantitative and qualitative:
- Quantitative analysis is the type of analysis based on complex mathematical and statistical modeling. Examples: revenue, profit.
- Qualitative analysis is the type of analysis based on the quality of something. It’s something that doesn’t relate to numbers. Examples: quality of a company’s management, brand-name recognition.
Stock Analysis: Tools
Financial statements are a core of quantitative analysis as the company disclosure information on business performance. There are three relevant financial statements you can evaluate before you make an investment in the company:
- Balance sheet. It’s a record of a company's assets, liabilities, and shares at a certain point in time.
- Income state. It evaluates a company's performance over a specific period of time.
- Statement of cash flows. The report shows the inflows and outflows of cash for a specified period.
Qualitative tools include intangible factors that can’t be calculated with numbers but are still significant to understanding a company’s state.
- Management. If you want to consider this factor, you can go to the company’s website and check the names and backgrounds of the top management people. When you know the names of the senior management, you can freely find news about them on the Internet.
- Business model. Before you invest in the company’s share, you should analyze what business it is involved in, whether it’s direct sales or perhaps just franchise fees.
- Competitive advantage. The company's advantage over other companies determines a company’s success. If the company can offer something unique, its value will grow for decades.
- Industry. It’s not enough to view the company separately from the industry where it operates. The company’s market share, the development of the sector, problems, or improvements in the industry will affect the company’s well-being.
There is an opinion that management is the most important qualitative factor of fundamental analysis. It can be true because leaders determine how the company will develop. If one of the leaders is involved in a scandal, fired, or has a severe disease, the company’s stocks will depreciate immediately.
Tips For Traders
You have learned a lot about fundamental analysis; let’s sum up how to use it. First, determine the market you want to trade. The forex market is the easiest way to apply fundamental analysis and boost your potential profits. Second, check the list of tools that are used for your market. Third, use the trading rules of the tools.
Fundamental analysis is much easier than technical analysis. Nevertheless, it requires practice. Use a demo account at Libertex and apply your knowledge. A wide range of assets available on the demo account will give you a chance to implement fundamental tools for every market we mentioned today.
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