A Quick Guide to Fundamental Analysis

Fundamental analysis allows investors to determine the real value of the stock and see the company’s potential for the future. This analysis opens up the best investment opportunities, as investors buy stocks that are currently undervalued, but have a high probability of rising over time. 

In this guide, you will find out more about fundamental analysis and its main benefits for investors.

What is fundamental analysis?

Fundamental analysis (FA) is a method that helps analysts measure the value of the company’s stock based on the evaluation of several factors, including qualitative, quantitative, financial, and economic. 

This type of analysis allows investors to identify undervalued companies that can potentially show great growth over the long term. The most common use of fundamental analysis is for value investing and growth investing.

The most common use of FA is for stocks, however, it can also be quite useful for the evaluation of any other security. Fundamental analysis can be used for the stock market as well as for other markets, including currencies, commodities, and any other security.

Analysts do thorough research on anything that can affect the value of the stock, including general macroeconomic factors like industry conditions and factors on the company’s level. 

The types of data used for fundamental analysis

FA combines assessment of all financial statements, external influences, events, and industry trends. It’s worth mentioning that the intrinsic value or a fair value of a stock will not change overnight. That’s why conducting such an analysis is important for better investment decisions. 

There are three common sets of data that are used for fundamental analysis:

1. Historical data. This type of data allows analysts to check the performance of the company in the past.
2. Alternative data. This includes all publicly known information about the company, such as management announcements, opinions of other investors and industry experts about the company.
3. Company’s internal data. It’s relevant information that is not publicly shared but can be helpful, for example how the leadership handled certain issues, difficult situations, etc.

When a FA is conducted for a stock, it typically involves reviewing many factors that are related to stock prices. These usually include:

• Overall industry performance 
• The political environment of the country where the company operates
• Trade agreements and external politics
• Financial statements 
• The company’s press releases
• Mentions of the company in the news 
• Competitor analysis

If the fundamental indicators suggest a negative impact, it will most likely negatively impact the share price. And if the data is positive, it could be a sign of a possibility of a higher company’s share price.

The main types of fundamental analysis

There are two main types of fundamental analysis:

• Qualitative. This type of analysis involves brand value, management decisions, and the company’s financial performance over a certain period of time.
• Quantitative. This analysis is purely based on numbers and focuses mostly on the company’s financial statements. Based on that data it concludes the share price.

Those approaches are quite different, however, the comprehensive analysis of the share price equally requires both of them. 

Fundamental analysis also involves two processes, such as top-down and bottom-up approaches. The top-down approach is a strategy where first you consider macroeconomic factors and then the company, while bottom-up is vice versa — first, it analyzes the company and then macroeconomic factors and their effects on the performance of the company.

Benefits of fundamental analysis

Investors utilize fundamental analysis to get a company’s stock’s fair price. And often the stock may not be trading at a fair value, as it can be overpriced or underrated. 

By using fundamental analysis, it’s easier to predict long-term trends happening in the stock market. The main benefit of this type of analysis is that investors are able to find good companies with strong growth potential, which they can invest in and gain high returns. 

Additionally, with the help of this analysis, investors are able to determine the future growth prospects about the particular sector or industry, which can also be quite beneficial for future investment decisions.

The difference between fundamental analysis and technical analysis

Besides fundamental analysis, there is also technical analysis, which is another method for making stock price predictions. Fundamental analysis focuses more on how the industry, economy, and the company will perform, which allows you to get a better idea of a company or stock worth.

The technical analysis considers internal market data like price and trade volume. This type of analysis is mostly focused on identifying repetitive patterns and trends so that the trader can capitalize on them. Technical analysis is preferred for short-term investments such as the active trading of stocks, while fundamental analysis is best for growth investing.

Conclusion

The main goal of fundamental analysis is to evaluate the intrinsic value of the company and then compare it with its current stock price. It helps to determine whether the company is undervalued or overvalued. This type of analysis allows investors to determine the quality of long-term investments in a variety of markets.