Understanding Fundamental Analysis

Fundamental Analysis is an approach to analyzing market behavior that stresses the relevance of the underlying factors of supply and demand. It is done in the belief that such analysis will enable an investor to anticipate price trends. A Fundamental investor relies principally on supply and demand considerations in price forecasting and for this purpose he analyzes the economic indicators, governmental policies and social factors. Economic indicators are published by government agencies or private sector and are released at predetermined times. The announcements themselves often lead to quick movements in the price of financial instruments and create a surge in volume.

Applying Fundamental Analysis  

Using fundamental analysis as an investing approach involves evaluating a financial instrument for the purpose of measuring its intrinsic value. This valuation method is undertaken by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the investment’s value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).

Fundamental investors are often described as ‘value investors’. The end goal of performing fundamental analysis is to produce a value that an investor can compare with a financial instrument’s current price, with the aim of figuring out what sort of position to take with that instrument. If an instrument is underpriced there is ‘value’ in the investment, and the investor may seek to profit by taking a long position (buy position) in the instrument. If the fundamental evaluation indicates that a security is overpriced, the investor will not buy into the investment and may even take a short position in the investment, aiming to profit on the price of the instrument declining in value.