Basics of Fundamental Analysis

Razvan Mihai


The Fundamental Analysis of a business involves analyzing its financial statements and health, management and competitive advantages. It is a technique that attempts to determine a security’s value by focusing on underlying factors that affect the business (or company) and its future prospects.

Often, fundamental analysis is used instead of macroeconomic analysis, when analyzing Forex. This type of fundamental analysis focuses on the overall state of the economy, and considers factors including manufacturing, management, employment, interest rates, production, inflation, earnings, housing and GDP.

Many investors use fundamental analysis alone or in combination with other tools to evaluate an economy or a financial instrument for investment purposes. The goal is to determine the current worth and, more importantly, how the market values the financial instrument.

This type of analysis was usually used for medium and long term investing. Nowadays, it is also used for short and very short term trading. Unexpected events are triggering high volatility which gives traders opportunities to speculate on the most affected financial instrument.

E.g. 1) Investor 1 is waiting for Apple Inc. to post its Q3 earnings. Estimations are that the EPS will be $2.5 per share. If the company will report a $5 profit per share, the probability for its price to rally is very big, so investor 1 could profit from the move.

E.g. 2) Investor 2 was expecting the release of the United States GDP for the previous quarter. The analysts were expecting a 2.2% growth, but the actual publication is 4.1% growth. Investor 2 will most likely speculate an appreciation for the US dollar for a short term period.

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