What is Fundamental Analysis?
Fundamental analysis is used by investors to evaluate the intrinsic value of a security or stock. It involves examining various factors related to a company’s financial health, performance, and overall outlook. Analysts conducting fundamental analysis delve into the company’s financial statements, such as income statements, balance sheets, and cash flow statements, to assess its profitability, revenue growth, and liquidity. This analysis helps investors make informed decisions about buying, selling, or holding onto a particular stock based on its long-term prospects and potential for future growth.
Features of Fundamental Analysis:
- Financial Statement Analysis: One of the central aspects of fundamental analysis involves examining a company’s financial statements, including the income statement, balance sheet, and cash flow statement.
- Qualitative Factors Assessment: In addition to quantitative financial data, fundamental analysis considers qualitative factors that can impact a company’s performance.
- Industry and Market Analysis: Fundamental analysis extends beyond evaluating individual companies to also consider broader industry trends and market conditions. Analysts assess factors such as market demand, competitive dynamics, regulatory environment, and technological advancements within the industry.
- Valuation Techniques: Fundamental analysis employs various valuation techniques to determine the intrinsic value of a company’s stock or security. Common valuation methods include price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, discounted cash flow (DCF) analysis, and comparable company analysis (CCA).
Difference between Fundamental and Technical Analysis
Fundamental and Technical Analysis are methods used in financial markets to evaluate securities and make investment decisions. Fundamental analysis involves looking at a company’s core financials and economic factors to determine its value over the long term. On the other hand, technical analysis focuses on studying past price and volume patterns of security to predict future movements.
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