There is more than one way to invest in the stock market. Fundamental analysis is one of the most common methods. Based on the study of economic fundamentals, it consists of determining the intrinsic value of a financial asset in order to compare it to its market value. While technical traders will derive all the information they need to invest from charts, fundamental traders rely on factors outside of the price movements of the asset itself. If the intrinsic value obtained by the fundamental analysis of the asset is lower than its market value, then the asset is undervalued. Conversely, if the intrinsic value is higher than the market value, then the asset is overvalued. Discover in this article the importance of fundamental analysis and its characteristics.
Fundamental analysis studies elements which make it possible to know a company well and to understand some of the factors which can affect the price of the share such as its financial health, its prospects for future growth, the solidity of its brand and quality of its management team.
It applies to any financial market whether stocks, stock indices, bonds, currencies or commodities.
Why Use Fundamental Analysis: Fundamental
analysis makes use of a company’s financial statements. This type of analysis relies on two basic assumptions:
- Companies present accurate and complete financial statements.
- Over the long term, the price of a security tends to return to its fair value.
The advantages and disadvantages of fundamental analysis:
- Thanks to fundamental analysis, the trader feels more and more independent of the market. Indeed, economic indicators make it easier for him to understand the trend of an asset (rise/fall).
- Moreover, the trader will not have to constantly monitor his investimenti online because fundamental analysis gives long-term signals. Positions are often held over several weeks and even years.
- Unlike technical analysis which is based on charts, fundamental analysis offers information on real facts. Indeed, it is more logical in the sense that it is based on the study of the various economic figures of reality.
- It is unable to provide information on the moments of very high market volatility or on the behavior of investors.
- It is limited when it comes to knowing the evolution of the price of the shares that interest us at a given period.
In short, fundamental analysis is widely practiced by some traders. Despite its limitations, it helps investors better understand companies as a whole.