Fundamental analysis is a method of examining the factors that influence and characterize a company or a market. When looking into details of a company, fundamental analysis takes into consideration its financial statements. When applied to futures or forex, it takes into account a broad palette of factors that influences the economy as a whole.
T.S or F.A ?
This is the first question that arises to the persons interested in this domain. F.A. is known for the analysing of the present situation having a more rapid effect. Meanwhile, T.A. is mainly based on past patterns based on which long term strategies can be built. Some considers that the T.A. is more accurate and some believes that the F.A. offers the real signals of trading. In my opinion the healthier way is the combination of both technical and fundamental analysis if a careful supervision of the market is wanted.
Why Fundamental Analysis?
It offers to the investors an overview of the investment opportunities encountered in the market. An important advantage is offered by the possibility to predict which stocks are valuable and which are not. This way, an investor can remark in advance the overestimated assets (in which case the investor is advise to enter a sell position) and underestimated assets (in which case the investor is advised to enter a buy position). Moreover, fundamental analysis provides the investor with a profound understanding of the instrument and the market that he targets. This way, he is able to take smart investment decisions.
How Can You Apply the Fundamental Analysis?
There are two approaches when using the fundamental analysis. The first one, top-down analysis, requires the investor to take a look at the bigger picture, the general condition of the economy followed by a tightening of the research to the specific domain of interest and a closer look the specific asset. The second approach consists of the bottom-up analysis when the investors pay attention first at the specific asset and after that they can expand its research towards the industry of interest.
Fundamental Analysis Based on The Asset That Interests Me!
Depending on the financial instruments included in your portfolio, there are various factors that need to be considered. Thus:
- When trading FX, you should pay attention to macroeconomic indicators as: interest rate, labor market, consumers’ confidence, inflation;
- When trading on the Equity Market, you should consider financial indicators as: general aspects of the company and assessment indicators (Price to Earnings Ratio, Price to Book Value, Price to Sales, dividend yield);
- When trading on the Commodities market, you should pay attention to: supply, demand and factors of impact (technological developments, new resources);
We can conclude that Fundamental Analysis represents the use of financial and macroeconomic indicators, along with news with impact strength in order to evaluate an asset. In order to compose an investment portfolio, a careful fundamental analysis is required.