Fundamental Analysis

Meaning and definition of fundamental analysis

Fundamental analysis can be explained as a method of estimating a security which involves attempting to evaluate its basic value by assessing allied financial, economic, and other quantitative and qualitative factors. Fundamental analysis aims at studying everything which affects the value of the security, including macro-economic factors (such as the overall economy and industry conditions) and company-specific factors (including financial condition and management).

This analysis method is taken as the opposite of technical analysis. As explained by Investopedia, fundamental analysis aims at using real data to evaluate the value of a security. Even though most analysts use fundamental analysis to evaluate stocks, this technique can be used for almost any type of security.

Objective of Fundamental analysis

The main goal of carrying out fundamental analysis is to generate a value that an investor can weigh against the current price of the security, with the goal of outlining the type of position to take with that security (underpriced = buy, overpriced = short or sell). In terms of stocks, fundamental analysis emphasizes on the financial statements of the company being assessed.

Example of fundamental analysis

Fundamental analysis can be illustrated as the example mentioned ahead. Let us assume that an investor can execute fundamental analysis on the value of a bond by looking at economic factors including interest rate and overall state of the economy, as well as information about the bond issuer, like potential changes in credit ratings. For evaluating stocks, this method involves the use of revenues, future growth, earnings, return on equity, profit margins and other data for determining the underlying value and possibility for future growth.