What is Fundamental Analysis?
Fundamental analysis refers to the method of estimating a financial asset or security’s real value by looking into its industry, microeconomic factors and direct company financials.
Fundamental analysts examine anything that can influence the security’s worth, from major economic conditions such as industry conditions and state of the economy.
Most times, microeconomic conditions like the strength of a company’s management, and watch for stocks that are trading presently at prices that are above or less than their original value.
Most importantly, the goal of fundamental analysis is to compare the financials of a company and match the current price of a security to find out whether the security is overvalued or undervalued.
This form of asset analysis is viewed differently from technical analysis which predicts the movement of prices via a review of historical market information such as volume & price.
Fundamental analysis relies on public data to assess the worth of a financial asset. e.g an investor can execute fundamental analysis on a bond’s value by considering economic factors such as the whole state of the economy & interest rates, then researching information about the bond issuer, credit ratings, and more.
SEE ALSO: What is Technical Analysis and Why is it Critical to Forex Trading?
5 Strategic Ways to Approach Fundamental Analysis
Top-Down Approach
A Top-down approachis centered on major factors like GDP forecasts, the condition of the economy, interest rates, unemployment level, etc.
By considering each one of these factors, an investor endeavor to predict the broader picture (general market trends & overall movement of the economy).
With stimulating corporate actions and announcements likely going to trigger a buillish run on the asset or security, you should be able to sift companies to invest in and those to steer clear off.
You can choose to go a step further and carry out the analysis on a corporate level to spot very promising stocks.
The concept here is to limit the investment horizon by narrowing your options to pick discrete stocks.
SEE ALSO: How to Correct Trading Losses and Become a Better Forex Trader
Bottom-Up Approach
Just as the name implies, the bottom-up approach upturns the pyramid and analyzes the situation right from the base level.
Investors who savor this methodology believe that the whole state of an economy may not influence the performance of certain stocks.
They ruminate that a few shares may possess high return potential, nevertheless being part of an unstable industry or sector.
Bottom-Up fundamentalists concentrate on financial statements, balance sheets, corporate earnings, press releases, supply & demand estimations, goods & services offered by the business, letters to investors, and other company-tailored sources of information.
It entails obtaining a transparent understanding of a certain company & its activities solely.
It is appropriate for changing situations and is more alluring to various types of investors, mostly ones who look for very rewarding stocks that can outperform the market, even when the market is unstable.
Old-Hand Approach
The Old-hand approach is used by analysts who are very familiar with the market they trade on they have a virtual intuition with regards to price changes.
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Balance Tables
Balance tables is a methodology that compares the present seasonal supply & changes from earlier seasons.
They also usher the corresponding seasons where analysts match the last seasons with related fundamental characteristics to the present one to create a ground plan for predicting price changes.
Regression Analysis
Lastly is Regression analysis. It is a statistical strategy used to develop predictions appertaining to the examined data.
An example of Fundamental analysis
For example, let’s look at the Coca-Cola Company. When assessing its stock, an analyst should consider the stock’s yearly dividend payout, P/E ratio, earnings per share, and several other measurable factors.
However, no analysis of Coca-Cola is absolute without taking into consideration of its recognition as a brand.
Final Thoughts
Fundamental analysis is an essential element of the financial markets’ influencers these days.
Gone are the days of alluring long-term investing, rather, investors are looking for short-term rewards and means to exploit impetus trading opportunities.
Fundamental analysis still plays a vital role in the approach of very successful investors.
What you realize is that getting the hang of fundamental analysis is worth it, even if it will require you to dedicate more time.
Warren Buffet’s net worth spends his time analyzing every stock# he is interested in before staking his money.
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