What is fundamental analysis?
Fundamental analysis is a very broad term. It encompasses information on the macro scale like the state of the economy, market sentiment and the position of the industry. Microeconomic factors pertaining specifically to a company like earnings, market share and management are also included and just as important.To get more news about
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Taken together, this data gives analysts an idea of whether a company stock is overpriced or undervalued. If it is the former, the natural response would be to consider selling it; in the case of the latter, it would make sense to buy stock.
While that approach makes sense in itself, the fundamental analysis does not often give black and white answers. Much of the considerations a trader makes, as well as the conclusions he draws from the data, is subjective. It is entirely possible for two analysts to look at the same information and come to opposite conclusions.
At LiquidityX, we place extraordinary emphasis on mathematical models to accurately foresee trends across the stock market, forex, and CFDs (contracts for difference). Fundamental analysis and technical analysis are central to all our financial planning.Good, the reliable fundamental analysis takes time and considerable effort. While much of the information needed for fundamental analysis can be obtained fairly easily, finding the correlation between a financial factor and stock performance can be an elusive goal.
More often than not, no single piece of information can paint an accurate and comprehensive picture of a stock’s value. Virtually all the different pieces of information are interrelated or affected by each other. To gauge whether a stock is overvalued or undervalued, you have to understand these relationships.
To begin, make a list of all the factors to use in your fundamental analysis. They will fall into two (2) categories – macroeconomic and microeconomic – as we discussed earlier.
Within each of these two lists, categorize every factor by the level of direct impact you gauge them to have on stock value. This is an assessment replete with grey areas and your assumptions will affect the ultimate result.
Next, assess how each factor affects the other factors. For example, a booming economy will place upward pressure on a company’s earnings as more people have the cash to buy products that the business produces. Conversely, if the economic boom is occurring but slowing down, the effect on earnings will also decline.
What you should have at the end of your assessment is a web of relationships between every factor. This is just the starting point of your analysis before you trade.The bulk of the opposition to fundamental analysis lies in its complex calculations and the imprecise manner in which factors are related. Assessments of factors are subjective and can vary significantly between analysts.
Also, as with any data, fundamental analysis cannot anticipate outliers and current events such as the COVID-19 pandemic. However, it also is largely ignorant of the cyclic nature of markets, which is the chief consideration in technical analysis.
The main advantage of fundamental analysis is that it gives a correlation between all the financial figures and the actual value of a stock or share. By taking the fundamentals that affect share price into consideration, you get a clear idea of whether a stock is overvalued or undervalued.
From that point, investing simply comes down to deciding whether you are comfortable with the magnitude of the difference between the actual value and potential value. Naturally, good assessments may place many companies in an intermediate grey area.
Remember, that does not mean that your analysis has been a waste – in fact, following the progress of these ‘grey stocks’ will allow you to identify important factors that you and even expert analysts may have overlooked.
What is fundamental analysis?
