Fundamental analysis definition

Fundamental analysis is a form of security analysis where investors look for the intrinsic value of the asset. That means evaluating micro and macroeconomic factors such as GDP, financial performance, or interest rates. It is often contrasted with technical analysis, the study of patterns in price history.

The goal of fundamental analysis is to identify undervalued or overvalued assets by examining their underlying financial and economic performance.

Fundamental analysis is particularly useful for long-term investors who are interested in buying and holding assets for an extended period. By understanding the intrinsic value of an investment, investors can make informed decisions about when to buy or sell a particular asset.

Techniques of fundamental analysis

Some common tools and techniques used in fundamental analysis include value investing, discounted cash flow (DCF) analysis, and analysis of earnings forecasts. These styles and strategies allow investors to evaluate a company’s financial health, growth potential, and future profitability.

In equities, fundamental analysis normally means looking into balance sheets and the firm’s profitability. A stock investment strategy focused on these metrics is value investing, where traders try and identify companies which are relatively undervalued in comparison with the broader market. The idea is that these companies will go on to outperform as other investors ‘catch up’ with the analysis.

Fundamental versus technical analysis

Fundamental analysis is often considered the rival or even opposite of technical analysis, the study of price movements and market data to try and predict future shifts. This is not necessarily the case, as although most traders tend to specialise in one or the other, technical and fundamental strategies should be used to complement each other.

One method is to use fundamental analysis to screen a number of stocks or other assets which you have a positive view on, then wait until technical conditions indicate a good entry point. This combination of fundamental case-making with technical analysis for market timing is justly popular.

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