Fundamental analysis

From Traderpedia

(Redirected from Fundamental Analysis)
The use of financial data (in the case of equities, economic information, and other impactful information (politics, weather, commodity prices, etc.) to determine the value of a security and/or forecast its future price level.

Although most often associated with stocks, Fundamental Analysis can be applied to any financial market in one fashion or another. The objective, in many cases, is to find situations where a market or security is undervalued.


[edit] Methods & Applications

There are several methods by which fundamental analysis is accomplished. They are, in many ways, integrated.

[edit] Economic analysis

This is the process by which one attempts to determine the strength of a given economy and/or how strong it will be in the future. For the most part this is thought of in terms of Gross Domestic Product (GDP) growth rates.

GDP growth is measured on a quarterly basis, but there are a number of indicators published regularly which are used by economists to estimate the current growth rate and anticipate future growth. They include:

  • Employment data
  • Construction (active and permits)
  • Manufacturing hours and efficiency
  • New orders
  • Consumer and Business Expectations Indices
  • Money supply
  • Interest rate spread (yield curve)
  • Stock prices (measured by one or more indices)

Indicators are often categorized as either leading, lagging, and concurrent.

[edit] Interest rate analysis

Interest rates are both a cause of and effect from economic growth. High rates tend to restrict growth, while low ones tend to stimulate it. At the same time, strong economic growth tends to lead to higher rates as investors seek better returns and concerns about inflation creep in, while slower growth will tend to put downward pressure on interest rates.

When considering interest rates, the following factors often come in to play:

[edit] Currency exchange rate analysis

Like intereste rates, the rate of exchange between one country's currency and those of other countries (see foreign exchange) both impacts a given economy and is impacted by it, and similarly ties in with interest rates. A currency will tend to be stronger when the economy is strong in comparisson to others and weaker when the economy is comparatively less strong. At the same time, exchange rates directly impact trade and investment.

Trade is often spoken about as the primary factor in foreign exchange. Also important are:

  • Interest rate spreads
  • Comparative prices
  • Inflation
  • GDP growth

[edit] Commodity price analysis

Commodities are inputs in to production goods. Since production is what GDP measures, their prices have a clear link to economic growth and health, and the changes in those prices is a factor of inflation.

Moreover, where commodities have a direct link to the consumer, they can exert a major impact on buying behavior. For example, because gasoline/petrol is often a non-discretionary item in any individual's budget, changes in the price of a gallon/liter directly impact the consumer's discretionary spending.

Commodity prices are a function of supply and demand. As such, they are impacted by:

  • Weather
  • Production problems
  • Labor issues
  • Disease (mad cow, crop blights, etc.)
  • Natural disasters

[edit] Stock market analysis

In general terms, when considering the broad stock market, one can use the aforementioned analytic applications to make directional determinations of the indices. When thinking in terms of sectors or specific companies, however, the analysis eventually comes down to the micro level and focuses on the value of a company where related to its assets and/or it earnings. Some of the measures utlized include:

[edit] Economic Releases

Although their influence can vary over time with changing market conditions, here is a list of some of the more important regular economic data releases:

  • Employment reports (jobs created/lost, unemployment rate, average hourly earnings)
  • Consumer and Producer price indices (CPI and PPI respectively)
  • Money supply reports
  • Central bank interest rate policy decisions
  • Gross Domestic Product (GDP)
  • Manufacturing output
  • Housing data (completions and permits)

These releases are scheduled well in advance and posted on economic calendars.

[edit] Advantages/Disadvantages

Markets, over the long haul, are driven by fundamental factors. Prices will go where the fundamentals lead. As such, fundamental analysis will provide a good indication of future price direction.

The problem, however, is one of timing. The markets will not always move in near term in the same direction the fundamentals point. What's more, once you get down to the short-term, other factors (trade flow, psychology, news) can have a larger influence.

[edit] T2W links

[edit] External links