Fundamental analysis is a market analysis technique for determining the intrinsic value of a [financial instrument] and all the components that can influence its price.
Fundamental analysis is used by traders and analysts globally to try and establish the correct value of a financial instrument and in turn establish if the instrument is currently undervalued or overvalued in the marketplace, to help inform their buying and selling decisions.
The analysis technique utilizes a plethora of factors such as a country’s economy data and news about its political climate to determine the country’s currency value along with industry conditions and key company news and data to value stocks and shares.
The contrasting analysis method is [technical analysis] which uses historical price data such as volume and indicators to predict future movements in price. Many traders will however use both; utilising fundamental analysis to obtain a longer-term macro view on the price of an instrument and technical analysis to determine entry and exit points for future trades.
Fundamental analysis will more often than not use a macro to micro perspective to arrive at the intrinsic value of an instrument. This is often referred to as a top down approach where the analyst will start by looking at the overall condition of a specific economy from a long-term perspective and then drill down into shorter time frame data points and economic releases to arrive at the current value of specific instruments.
Key takeaways:
- Fundamental analysis is used to determine the intrinsic value of an instrument to determine if it is currently undervalued or overvalued in the marketplace
- Fundamental analysis uses a top-down approach, starting from a larger macro view and drilling down into shorter-term micro conditions
- Fundamental analysis will often be used by traders along with technical analysis to determine entry and exit points for future trades
- Fundamental analysis will utilize a wide variety of data and economic conditions to help the analyst arrive at the intrinsic value of an instrument