What is Fundamental Analysis?

Overview

Fundamental analysis is based on the idea that the market cannot be depended upon to accurately price a stock. This type of approach towards trading looks at external factors such as earnings reports, economic news, and explores how these factors will impact the inherent price of the stock in the future.

Technical analysis is associated more with short term traders who want to rely on a pattern to decide when to enter and exit the market. Fundamental analysis is appealing to the traders who are interested in holding on to their stocks on a long term basis.

Value Investing

Many investors who rely on fundamental analysis believe in “value investing” i.e. they look for stocks that are priced at a discount but their intrinsic value is calculated to be higher than the market price. Fundamental analysts would therefore place long term trades on such stocks.

Determining the intrinsic value of a stock is a fundamental analyst’s chief mission. A fundamental analyst looks at a company’s profile, latest earnings reports, what types of news releases are expected from the company and then analyses whether the market has correctly priced all the information into the stock.

Successful fundamental analysts do not shy away from financial statements. Analysts look at a company’s revenue, expenses, assets, liabilities and all other financial aspects of a company. Taking all this into account, the fundamental analyst attempts to understand what the true value of the stock should be.

One can get started with Fundamental Analysis by researching how stock prices are determined by a market. Understanding how to interpret earning reports, financial statements, balance sheets, cash flow statements, etc. can help you learn how stock prices move in reaction to these factors. That way, the next time you feel that a stock is under-priced, then you can invest in that stock more confidently.

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