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Basics FAQ of Fundamental Analysis


Learn the Basics of Fundamental Analysis,  Using Fundamental Analysis FAQ


Using Fundamental analysis to pick up stocks, currencies, and other financial instruments is a very common and reliable way of investing. Fundamental analysts focus on information and macroeconomic factors that are affecting the true value of a financial security. This information may include both internal and external factors as mentioned below.

If you want to find more information regarding corporate valuation Press here.

Fundamental Analysis is mainly used in evaluating classic financial assets like stocks, bonds, and commodities. Analysis of more volatile financial instruments -like options- is based on more complicated trading aspects (intrinsic value, volatility, time to maturity). 


The Goals of Fundamental Analysis

The main goal of a fundamentalist is to trace and trade financial securities that are priced below their fair market value. Fundamental analysis is focusing on estimating the fair value of a targeted financial security. Another important task for a fundamentalist is to identify and measure the potential risk of each investment decision. Risk identification is essential for managing your portfolio in an efficient and effective way. These are the main goals of fundamental analysis: 
1) Determine Fair Value of a security (profit potential estimation) 
2) Identify and measure risk incorporated (loss potential estimation)  
Fundamentals are based on internal and external factors affecting an investment. For example if you buy a US stock you must be aware about the company’s balance sheet but also be aware about US economy figures and especially about the corresponding industry figures.

 

Building a Fundamental Analysis Framework 

 
Internal Fundamental Factors 

Internal factors of fundamental analysis include facts and figures concerning a particular company. Most important internal factors are: 
1) Earnings per Share – EPS 
2) Projected Earning Growth – PEG 
3) Dividends Paid 
4) Sales per Share 
5) Shareholders Equity 
6) Debt exposure Analysis  
7) Cash-Flow Analysis 
8) Management experience and effectivness (ROE and ROI ratios)
9) Strategic Analysis concerning new investment projects  
10) Estimations about future Demand / Supply of the company's products / services


External Fundamental Factors 

External factors include information concerning the global and local economy but also information about the related industry. 

a) Macroeconomic Factors:
1) Level of interest rates 
2) Market liquidity / Inflation 
3) Industrial Production 
4) Currency Exchange Rate 
5) Political Stability and Strategic Analysis  

Particular Industry Factors: 
6) Projected Growth Rate 
7) Projected Demand / Supply 
8) Current and future Investment projects  
8) SWOT analysis (strengths-weaknesses-opportunities-threats) 
9) Strategic Analysis (using tools like Michael Porter's 5 forces model) 
 


Technical Analysis Vs Fundamental Analysis

These two forces (Technical Analysis and Fundamental Analysis) are forming a complete framework of trading analysis in the financial markets.

» Learn the Basics of Technical Analysis

The different nature of each of these forces is based on time. In short-term periods Technical Analysis is much more effective in contrast to long-term periods where fundamentals are far more important. Usually traders who are using technical analysis to pick-up stocks do not care about fundamentals and vice versa Fundamentalists don't care about the predictions of Technical Analysis. Wise investors (or even traders) use them both.

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