Fundamental analysis is one of the methods used by investors and traders to evaluate the true value of financial assets, such as stocks, currencies or commodities. This type of analysis is based on examining and evaluating the fundamental factors that may affect the value of the financial asset.
It’s a method used to assess the intrinsic value of securities by examining and analyzing various economic, financial and qualitative factors. The objective of fundamental analysis is to assess the health and core performance of a company or asset to determine its true value and potential for future growth.
The main elements of fundamental analysis include:
Financial Statements: Review the Company’s financial statements, including the income statement, balance sheet and cash flow statement, to assess their financial correctness.
Earnings and Revenue: Analyze a company’s profit growth and revenue trends to understand its profitability and ability to generate income.
Dividends: A study of the history and policy of a company’s dividend, which can be an indicator of its financial stability and commitment to returning value to shareholders.
Macroeconomic factors: Consider broader economic indicators, such as interest rates, inflation, and economic growth, to understand the impact of the external environment on the company.
Industry and market trends: assess the specific industry and market conditions in which the company operates to identify potential opportunities and risks.
Management and Leadership: Evaluate the competence and experience of the company’s management team and their strategic decisions.
Competitive analysis: understanding the company’s position in relation to its competitors and analyzing its competitive advantages or disadvantages.
Regulatory environment: Study the regulatory framework in which the company operates and assess potential legal or regulatory risks.
Differences between technical analysis and fundamental analysis
Fundamental analysis and technical analysis are two different ways of analyzing and making investment decisions in the financial markets. Here are the main differences between them:
Data used:
Fundamental analysis: It is based on financial statements, earnings reports, economic indicators and other quantitative and qualitative data related to the company or assets.
Technical Analysis: Uses historical price and volume data, as well as chart patterns and technical indicators such as moving averages, relative strength index (RSI) and MACD (moving average convergence divergence).
Time horizon:
Fundamental analysis: In general it has a long-term perspective. Investors who use fundamental analysis aim to assess the intrinsic value of an asset and make decisions based on its long-term potential.
Technical analysis: It can be applied to different timeframes, including short-term trading and day trading. Technical analysts often focus on short-term price movements and trends.
Foundations of decision-making:
Fundamental analysis: It aims to determine whether an asset is overvalued or undervalued based on its underlying factors. It helps investors make decisions about buying or selling assets in the long term.
Technical Analysis: Focuses on historical price patterns and trends to predict future price movements. Traders who use technical analysis make their decisions based on the assumption that historical price patterns will recur.
Use of graphs:
Fundamental analysis: In general, it does not rely heavily on charts. Investors who use fundamental analysis may look at historical context charts but focus primarily on financial and economic data.
Technical analysis: relies heavily on charts and graphical representations of price data. Chart patterns and technical indicators are essential tools for technical analysts.
In practice, some investors and traders may use a combination of fundamental and technical analysis to make informed investment decisions. This approach is known as “fundamental technical analysis” or “merger analysis”.
Special economic indicators and their relationship to analysis
Economic indicators for analysis have a significant impact on foreign exchange and CFD prices. For this reason, many traders are intensifying the follow-up of the economic calendar, to ensure that they follow the latest economic developments and prepare for any fluctuations that may face them in the near future.
- Economic growth: refers to the change in a country’s GDP (economic growth). Economic growth is usually measured year-on-year and reflects the increase in production and spending in the economy. Sustainable economic growth is a positive signal for the country and affects currency rates and financial markets..
- Unemployment rate: refers to the proportion of the unemployed in relation to the total labor force in the country. The unemployment rate is an important indicator of the health of the economy and its ability to provide jobs. High unemployment rate may indicate weakness in the economy and may negatively affect the currency.
- Foreign Trade: refers to the surplus or deficit in a country’s foreign trade. Foreign trade is measured by the difference in the value of exports and imports of a country. A trade surplus indicates that a country exports more than it imports, while a deficit indicates the opposite.
- Employment and wages: refers to the average wage and employment rate in the country. The employment rate reflects the economy’s ability to create jobs, while wages reflect the income level and purchasing power of consumers. Labor market performance and wages can affect consumption and spending and therefore the economy in general..
- Inflation rate: refers to the increase in the prices of goods and services over time. The inflation rate is an important indicator of the strength of the currency and the ability of the economy to maintain price stability. Unsustainably high inflation could negatively affect the economy and currency strength.