Fundamental Analysis

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What is Fundamental Analysis?

Fundamental Analysis (FA) is the research and examination process that tries to determine the intrinsic value of a company or security through an evaluation of its financial statements and other underlying factors to predict future price trends. This research process can also be conducted for an industry, market, or the entire economy. Usually long-term oriented.

As far as analyzing a company is concerned, it attempts to analyze the company's operations and strategy and the market in which the company is operating to understand the status and growth potential of the company. Typical factors to consider include: assets, revenues, earnings, products, management, markets, economy,  and risk.

The intensive examination process that fundamental analysis conducts has several key benefits that accrue primarily to investors. Those are the following:

• Long-term perspective: Fundamental analysis identifies long-term economic, demographic, technological or consumer trends. As such, this type of analysis is beneficial especially in terms of making long-term investment decisions.
• Value spotting: Fundamental can detect those organizations with strong valuable assets and balance sheets, high stability and competitive power. This implies that it is beneficial through its ability to identify organizations that represents a high value.
• Business acumen: The high intensity of fundamental analysis creates a thorough understanding of the organizations key revenue and profit creators and other value drivers within the organization. This helps investors to identify those organizations that ensure long-term delivery and those that dont.
• Categorizing stocks: Since stocks usually move jointly, it is important for investors to be able to position themselves to place stocks within each different industry group. This can be better achieved if those investors have a clear understanding of the business. It actually can make large differences in relative values.

As a general rule of thumb, a security should be bought if the market price is lower than its intrinsic value. On the other hand, the stock should be sold if the market price exceeds its intrinsic value.

There are two sides to FA: Quantitative Investment Analysis, considering factors that can be measured in a numeric way, and Qualitative Investment Analysis, which is looking at factors of another kind, which can not be expressed numerically, at least not in a simple and direct way.

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Compare with: Technical Analysis  |  Investor Sentiment  |  Market Perform  |  Cognitive Bias  |  Discounted Cash Flow  |  Economic Value Added  |  Market Value Added  |  Index Fund  |  Mutual Fund  |  Buy-Side Analyst  |  Sell-Side Analyst  |  Qualitative Investment Analysis  |  Quantitative Investment Analysis

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