Fundament Analysis

What is 'Fundamental Analysis'

Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the security's value, including macroeconomic factors such as the overall economy and industry conditions, and microeconomic factors such as financial conditions and company management. The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security's current price, thus indicating whether the security is undervalued or overvalued.

BREAKING DOWN 'Fundamental Analysis'

Fundamental analysis determines the health and performance of an underlying company by looking at key numbers and economic indicators. The purpose is to identify fundamentally strong companies or industries and fundamentally weak companies or industries. Investors go long on the companies that are strong, and short the companies that are weak. This method of security analysis is considered to be the opposite of technical analysis.

The Basics of Fundamental Analysis

Fundamental analysis uses real, public data in the evaluation a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security. For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors such as interest rates and the overall state of the economy. He can also look at information about the bond issuer, such as potential changes in credit ratings.

For stocks and equity instruments, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of the company being evaluated. One of the most famous and successful fundamental analysts is the so-called "Oracle of Omaha", Warren Buffett, who is well known for successfully employing fundamental analysis to pick securities. His abilities have turned him into a billionaire.

An Example of Fundamental Analysis

Even the market as a whole can be evaluated using fundamental analysis. For example, analysts looked at fundamental indicators of the S&P 500 for the week of July 4 to July 8, 2016. During this time period, the S&P rose to 2129.90 after the release of a positive jobs report in the United States. In fact, the market just missed a new record high, coming in just under the May 2015 high of 2132.80. The economic surprise of an additional 287,000 jobs for the month of June specifically increased the value of the stock market on July 8, 2016.

However, there are differing views on the market's true value. Some analysts believe the economy is heading for a bear market, while other analysts believe it will continue as a bull market.

The fundamentals include the qualitative and quantitative information that contributes to the economic well-being and the subsequent financial valuation of a company, security or currency. Analysts and investors analyze these fundamentals to develop an estimate as to whether the underlying asset is considered a worthwhile investment. For businesses, information such as revenue, earnings, assets, liabilities and growth are considered some of the fundamentals.

BREAKING DOWN 'Fundamentals'

In business and economics, the fundamentals represent the basic qualities and reported information needed to analyze the health and stability of business or asset in question. This can include topics within both the macroeconomic and microeconomic disciplines that are considered standards for determining the financial values attributed to the assets.

Macroeconomics and Microeconomics

Macroeconomic fundamentals include topics that affect an economy at large. This can include statistics regarding unemployment, supply and demand, growth, and inflation, as well as considerations for monetary or fiscal policy and international trade. These categories can be applied to analysis of a large-scale economy as a whole or can be related to individual business activity to make changes based on macroeconomic influences.

Microeconomic fundamentals focus on the activities within smaller segments of the economy, such as a particular market or sector. This can include issues of supply and demand within the specified segment, as well as the theory of firms, theory of consumers and labor issues as related to a particular industry.

Fundamentals in Business

By looking at the economics of a business, such as the balance sheet, the income statement, overall management and cash flow, investors are looking at a company's fundamentals, which help determine the company's health as well as its growth prospects. A company with little debt and a lot of cash is considered to have strong fundamentals.

Strong fundamentals suggest that a business has a viable framework or financial structure, while those with weak fundamentals may have issues in the areas of debt obligation management, cost control or overall organizational management. A business with strong fundamentals may be more likely to survive negative events, such as economic recessions or depressions, than one with weaker fundamentals and may indicate less risk should an investor consider purchasing securities associated with the aforementioned businesses.

Other Fundamentals in Economics

While fundamentals are most often considered factors that relate to businesses, securities and currencies also have fundamentals. For example, interest rates, GDP growth, trade balance surplus/deficits and inflation levels are some macroeconomic factors that are considered to be fundamentals of a currency's value.

Stock analysis is a term that refers to the evaluation of a particular trading instrument, an investment sector or the market as a whole. Stock analysts attempt to determine the future activity of an instrument, sector or market. There are two basic types of stock analysis: fundamental analysis and technical analysis. Fundamental analysis concentrates on data from sources including financial records, economic reports, company assets and market share. Technical analysis focuses on the study of past market action to predict future price movement.

BREAKING DOWN 'Stock Analysis'

Stock analysis is a method for investors and traders to make buying and selling decisions. By studying and evaluating past and current data, investors and traders attempts to gain an edge in the markets by making informed decisions. Many people who subscribe to fundamental analysis don't hold much faith in technical analysis, and vice versa.


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