Fundamental analysis is seen by many as the opposite to Technical Analysis. Some people say that you cannot be both. To some extent this is true but adopting one approach should not preclude you from using the other.
At its core, Fundamental Analysis is an approach that attempts to identify an assets intrinsic value. The asset is then purchased if the intrinsic value is higher than the current market valuation, or sold if it is lower. This approach is typically applied to stocks and shares although the approach can be applied to any asset type.
Fundamental analysts will study all aspects that affect the asset they are analysing. This list can be almost endless but the common areas of study are as follows:
- State of the economy (global, national, regional)
- Political stability
- State of the industry (the sector the asset belongs to)
- Management competence
- Company reports
- Balance sheets
- Earnings
- Dividends
- Cash flow
- Company news
The above list falls into 2 categories, quantitative and qualitative. The quantitative category refers to elements that can be measured in numerical terms. For example, earnings can be measured in absolute monetary terms, on a per share basis or as a percentage of revenue. The qualitative category refers to elements that are more subjective and cannot usually be expressed in numerical terms. For example, management competence is subjective to the person analysing and is hard to quantify.
Conclusion
If you are still unsure whether fundamental analysis is right for you then take a look at our comparison page. We identify the pros and cons of technical and fundamental analysis.