What is fundamental analysis?

Fundamental analysis focuses on the intrinsic or actual value. According to the theory of fundamental analysis, the price of a stock will inevitably reach this value. With fundamental analysis, you don’t look at the price that it had reached in the past, but you make predictions about where the price will go in the near future.

Tip: With stock the intrinsic value is equity minus debt.

Fundamental analysis with Forex

When trading Forex, macro-economic data is very important. Because the market is so big, one small party hardly has any influence over the price of a currency. When trading Forex the entire economic situation and the geopolitical stability within a region where the currency is used are important. Consider the following important factors:

  • fundamental analysisThe actual interest rate
  • Gross domestic product
  • The consumer price index, inflation and other expense indicators
  • Employment rates within the region
  • Consumer trust
  • Balance of the trades
  • Fiscal and monetary policy of the government

In the article ‘Fundamental analysis in Forex’, we go deeper into the most important economic indicators that you can use for fundamental analysis.

Fundamental analysis with stocks

With trading stocks the microeconomic indicators play an important role as well. Because the trading volume of stocks is a lot lower than that of currency pairs, it is important to look at the smaller, more nationally focussed key figures. For example:

  • Net result
  • The expected dividend
  • Liquidity of the company
  • The debt in relation to the equity
  • The growth of the company compared to last year
  • Growth of the company compared to the competition

With stocks, all kinds of news items can have a giant impact on the price of a stock. When the CEO of a company is sick for a week the price can go down. Rumours (that often turn out to be false) can cause prices to make odd jumps. For example, there are often rumours about a possible company takeover.

We can conclude that the fundamental analysis is harder to do with stocks due to the fact that there are more factors that play an important role. The price of a stock is harder to predict than the price of currency pairs.

Pros and cons of fundamental analysis

Fundamental analysis is particularly important when determining the investment options for the middle to long term. By analysing the results, you can predict if the outlook for a stock or a currency pair is looking good. By determining the value of an investment, you can determine if it’s best to buy or sell.

The downside of fundamental analysis is the fact that there are so many indicators. Especially for the beginning trader, it can be a bit overwhelming to keep track of all these numbers. Most traders choose to do technical analysis, which looks at the historic prices to predict future developments.

Although a combination of both fundamental and technical analysis is the most successful strategy, it seems that in reality it is next to impossible to accomplish this combination. Only for people who spend all their time trading it is realistic to do this properly. It’s a matter of trial and error to see what works best for you.

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