What is Fundamental Analysis?
Fundamental analysis is one of the primary market analysis methods that help traders evaluate the intrinsic or true value of an asset and gauge the factors that could potentially contribute to change or influence an asset’s future price in the market. The fundamental analysis is the classic way of analyzing a market based on external influences and events, in light of financial records and industrial trends.
Along with fundamental analysis, technical analysis is another major way of analyzing a market and its trends. Using technical analysis, traders compile all the information regarding an asset’s price charts and historical behaviors while fundamental analysts mostly focus on the asset itself and it’s true value, outside the scope of price movements. They try to estimate its true worth and evaluate them accordingly.
Fundamental Analysis Examples
There are many tools and techniques that traders or market experts can utilize for carrying out a thorough fundamental analysis of a company. This analysis is mainly categorized into two types. The first one is the top-down and the other is the bottom-up analysis. As the names suggest, the top-down strategy starts with viewing the whole market as a whole and then narrowing down to a specific sector, then an industry and finally a particular company. On the other hand, the bottom-up strategy starts from the companies and their specific stocks and works its way up to sectors and industries they lie in.
Bonds and Forex are some of the most traditional asset classes and they can be analyzed using the fundamental way to evaluate share prices.
The specific tools that market experts or ordinary traders use for their fundamental analysis change according to the asset being traded. For instance, if a trader is analyzing share-assets, they’ll take a look at that company’s numbers in financial records in areas like projected growth, revenue, profit margins or earning per share (EPS). On the other hand, a forex trader uses numbers based on financial statements released by a central bank about its country’s economic conditions.
Advantages and Disadvantages of Fundamental Analysis
Pros:
Fundamental analysis techniques help investors and traders accumulate accurate information to make educated decisions and take calculated risks. Making decisions on reliable financial data leaves very little room for any personal grudges and reduces risks.
Fundamental analysis techniques help people gauge the true value of a particular asset as undervalued or overvalued rather than identifying the buy-sell, exit-entry points.
Cons:
As much as they’re preferred, fundamental analysis techniques require a lot of time and research.
Because of the fact that fundamental analysis is a complex, long-term overview of a market or a particular asset, the resulting data is not good for making decisions fast. Traders who are looking for ways to enter or exit trades quickly will have to rely on short-term technical analysis.
An asset or stock’s true worth as described by fundamental analysis alone can’t stand for worst-case scenarios in the market. It’s important to have a thorough market view and stay prepared for an economic, legislative or political set-back or surprise.