What is Fundamental Analysis?
Fundamental analysis is a technique used by some traders in
stock selection and forecasting. It endeavours to find the “true” intrinsic
value of a stock by studying several factors. Fundamental analysis attempts to
answer your question: “Is this stock cheap?”
The Basics of Fundamental Analysis
Fundamental analysis explores external and internal factors that may impact a stock price. A company can have very strong fundamentals; however, if the economy is not doing well, this means that the company’s stock price will not either. Likewise, a company that has poor fundamentals will see a stock price that will struggle even during a boom. There are external as well as internal factors that need to be taken into consideration. We will discuss below some of the most important external and internal factors that fundamental analysts look at.
External Factors
External Factors are exogenous factors that the company cannot control, yet they may impact its profitability. These factors range from the economy at large down to the specific market and all the way to the sector and industry the company operates in.
Internal Factors
Internal factors are endogenous factors that the company can control. They reflect the strength of management as well as its product offering amongst other things. These can be explored by analysing quantitative factors, such as the financial health of the company, as well as qualitative ones, such as a company’s managerial approach.
FAQs
Have a question on Fundamental Analysis? Check out answers to some popular questions below. Alternatively, write to us!
What is the difference between Fundamental Analysis and Technical Analysis?
Fundamental analysis aims to find the stock's "fair value" based on the company's underlying financial statements, industry characteristics and trends, as well as internal and external factors. Technical Analysis does not care about "fair value" or underlying factors. Instead, it tries to establish patterns based on historical data.
Do I need to understand Technical Analysis if Fundamental Analysis is good enough for me?
Not really! Whilst it is good to have a brief understanding of both approaches before deciding what works well for you, each approach is actually independent of the other. However, if you are able to come up with a model that incorporates both, then your chances of success in trading will be higher.
Before You Go...
Beginning Trader
I am all confused; I am only just getting started. Please take me back to the basics! I would like to start from the very beginning.
Technical Analysis
Stock Selection
OK! So now you understand Technical Analysis and Fundamental Analysis. How would you go about selecting stocks?!