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What is Fundamental Analysis?

Fundamental Analysis is one of the foundations of being a trader. In order to understand how a trade works, learning fundamental analysis is a key concept to succeed in this trade.

To put it simply, Fundamental Analysis is a means of assessing a security through aspects that include finance, economics, and any available macroeconomic factors. Even though it is mostly used on stocks, it could also be used for industries and economies. But in this article, we would be focusing on its usage with regards to stocks.

Basically, its learning the fundamentals to evaluate a company’s economic health. The problem now comes in, what factors indicate a company’s economic health? It could very well may be anything, ranging from the apparent factors such as earnings and sales to the obscure such as the company's managers and the employees attitude. To make it clearer, economists and analysts categorized these fundamentals. Fundamental analysis examines the characteristics of a security in two ways: quantitative and qualitative.

Quantitative

These are the factors that may be measured in numbers. Obviously, this is where revenues, market shares, company assets, and anything numeric in value fall into.

Qualitative

These are factors that cannot be measured but instead analyzed through the quality and the characteristics of a company and other intangible elements. These factors include the management quality, the company’s popularity, and its proprietary technology.

Quantitative and qualitative factors go hand and hand in assessing a company’s well-being. And even that is not enough to precisely put a price on a company’s real worth. But it will come close.

Intrinsic Value

Besides the quantitative and qualitative, a stock has an intrinsic value. Intrinsic value is the supposed real value of a stock. The concept goes that a stock may be sometimes mispriced to be cheaper or more expensive thus market participants take advantage of it, by buying or selling, depending on the circumstance, as believers of intrinsic value have faith that the real price of the stock will be reflected on the market sooner or later. The problem here is that nobody is certain when the sooner or later will come. It is also important to note that the computation of intrinsic value is never certain as there are no universal basis on how to compute it.

Fundamental analysis is an integral part of trading as it is the analysis of a stock. It serves as a guide for countless traders on what they should do next. That’s why even with no absolute certainty, traders and market participants delve in fundamental analysis.

Created by : Alex
Published : 17 Aug 2015

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