Fundamental Analysis

AAA

DEFINITION of 'Fundamental Analysis'

A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).

The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price, with the aim of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short).

This method of security analysis is considered to be the opposite of technical analysis.

INVESTOPEDIA EXPLAINS 'Fundamental Analysis'

Fundamental analysis is about using real data to evaluate a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security.

For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of the company being evaluated.

One of the most famous and successful fundamental analysts is the Oracle of Omaha, Warren Buffett, who is well known for successfully employing fundamental analysis to pick securities. His abilities have turned him into a billionaire.

VIDEO

Loading the player...
RELATED TERMS
  1. Earnings Power Value - EPV

    A technique for valuing stocks by making an assumption about ...
  2. Asset Valuation

    A method of assessing the worth of a company, real property, ...
  3. Annual Report

    1. An annual publication that public corporations must provide ...
  4. Income Statement

    A financial statement that measures a company's financial performance ...
  5. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
  6. Quantitative Analysis

    A business or financial analysis technique that seeks to understand ...
RELATED FAQS
  1. Why is the Trade Volume Index (TVI) important for traders and analysts?

    The trade volume index (TVI) is important for traders and analysts because it indicates whether an asset is being accumulated ... Read Full Answer >>
  2. Is it better to use fundamental analysis, technical analysis or quantitative analysis ...

    The most common methods that investors use to analyze the benefits and risks associated with long-term investment in the ... Read Full Answer >>
  3. What are the most popular forms of technical analysis?

    The most popular forms of technical analysis are simple moving averages, support and resistance, trend lines and momentum-based ... Read Full Answer >>
  4. Why is trading volume important to investors?

    Trading volume, or volume, is the number of shares or contracts that indicates the overall activity of a security or market ... Read Full Answer >>
  5. Should investors care more about microeconomics or macroeconomics?

    Individual investors are probably better off focusing on microeconomics than macroeconomics. There may be some disagreement ... Read Full Answer >>
  6. Has the Efficient Market Hypothesis been proven correct or incorrect?

    There is evidence to support the reasoning behind the efficient market hypothesis, but the basic conclusion drawn from the ... Read Full Answer >>
  7. What is the best method of analysis for forex trading?

    Types Of Analysis Used In ForexForex analysis is used by the retail forex day trader to determine whether to buy or sell ... Read Full Answer >>
Related Articles
  1. Forex Education

    Trading Is Timing

    Learn how to make gains even if you don't get in at the right time.
  2. Investing Basics

    What Are A Stock's "Fundamentals"?

    The investing world loves to talk about fundamentals, but do you know what it means?
  3. Markets

    Why You Shouldn't Buy Investments You Know

    Though it's got merit, buying what you know could hold you back from achieving greater investment yields.
  4. Active Trading Fundamentals

    Efficient Market Hypothesis: Is The Stock Market Efficient?

    Deciding whether it's possible to attain above-average returns requires an understanding of EMH.
  5. Options & Futures

    Trader's Corner: Finding The Magic Mix Of Fundamentals And Technicals

    For a record-holding stock trader, CANSLIM is the formula that identifies this magic mix.
  6. Active Trading Fundamentals

    Mad Money ... Mad Market?

    Jim Cramer's spirited recommendations are a case study in irrational market behavior.
  7. Active Trading Fundamentals

    Finding Short Candidates With Technical Analysis

    Learn how to distinguish tops and bottoms in the equity market when short selling.
  8. Active Trading

    Blending Technical And Fundamental Analysis

    Find out how you can combine the best of both strategies to better understand the markets.
  9. Markets

    Introduction To Fundamental Analysis

    Learn this easy-to-understand technique of analyzing a company's financial statements and reports.
  10. Options & Futures

    Advanced Financial Statement Analysis

    Learn what it means to do your homework on a company's performance and reporting practices before investing.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center