March 11, 2022
What Is Fundamental Analysis
Fundamental analysis is a method used to measure the intrinsic value of a security of an investment asset by examining related financial and economic factors. When conducting fundamental analysis, you study everything that affects the value of security. This may include macroeconomic factors like the state of the economy and microeconomic factors like the efficiency of the company’s management. Based on the analysis you can determine whether the price of the security is overvalued or undervalued.
How Fundamental Analysis Works
The purpose of conducting an investment analysis is to determine whether the security or asset is valued correctly within the broader market. With fundamental analysis, the approach involves checking both the micro and macros perspective of the market to identify assets not correctly priced by the market.
As a fundamental analyst, you will be studying the overall state of the economy. Then you go down to the strength of specific industries and concentrate on the performance of a specific company. This process will help land you at a fair market value for the asset. The method differs from the technical analysis in that the investor looks at factors outside the price movement of the security. In technical analysis, all the information is derived from the charts while fundamental include economic news and more.
One of the defining features of fundamental analysis is that it uses public data to assess the value of a stock or any other kind of asset. For instance, you may perform fundamental analysis on the value of a bond by looking at economic factors like interest rates and the state of the economy. You can narrow down the analysis to the bond issues to check on issues such as potential changes in its credit rating.
If you are conducting fundamental analysis on a stock, your focus for invest in stocks will be the company earnings, revenues, return on equity, future growth, and profit margins. You may also analyze any form of data that helps determine the underlying value of the company and its potential for future growth. Such data is publicly available in the company’s financial statements.
Fundamental analysis is an approach to evaluating the intrinsic value of a security, by reviewing factors that are likely to include its price in the future. The analysis is based on external influences and events, industry trends, and financial statements. An investor will also analyze trends in the economy to determine the possible direction of the value or price of the asset.