Loading the player...

What is 'Fundamental Analysis'

Fundamental analysis is a method of evaluating a security in an attempt to assess its intrinsic value, by examining related economic, financial, and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the security's value, including macroeconomic factors (e.g. economy and industry conditions) and microeconomic factors (e.g. financial conditions and company management). The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security's current price, thus indicating whether the security is undervalued or overvalued.

BREAKING DOWN 'Fundamental Analysis'

Fundamental analysis determines the health and performance of an underlying company by looking at key numbers and economic indicators. The purpose is to identify fundamentally strong companies or industries and fundamentally weak companies or industries. Investors go long (purchasing with the expectation that the stock will rise in value) on the companies that are strong, and short (selling shares that you believe will drop in value with the expectation of repurchasing when at a lower price) the companies that are weak. This method of security analysis is considered to be the opposite of technical analysis, which forecasts the direction of prices through the analysis of historical market data, such as price and volume.

[Most of the world's most successful investors use fundamental analysis to find investment opportunities. If you're new to fundamental analysis, Investopedia's Fundamental Analysis Course will show you everything that you need to know to get started. You'll learn how to read financial statements, how to interpret financial ratios, and how to develop strategies used by investment professionals on a day-to-day basis in over five hours of on-demand video, exercises, and interactive content.]

The Basics of Fundamental Analysis

Fundamental analysis uses real, public data in the evaluation 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. He can also look at information about the bond issuer, such as potential changes in credit ratings.

For stocks and equity instruments, fundamental analysis 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 so-called "Oracle of Omaha," Warren Buffett, who is well known for successfully employing fundamental analysis to pick securities.

An Example of Fundamental Analysis

Even the market as a whole can be evaluated using fundamental analysis. For example, analysts looked at fundamental indicators of the S&P 500 from July 4 to July 8, 2016. During this time, the S&P rose to 2129.90 after the release of a positive jobs' report in the United States. In fact, the market just missed a new record high, coming in just under the May 2015 high of 2132.80. The economic surprise of an additional 287,000 jobs for the month of June specifically increased the value of the stock market on July 8, 2016.

However, there are differing views on the market's true value. Some analysts believe the economy is heading for a bear market, while other analysts believe it will continue as a bull market.

RELATED TERMS
  1. Fundamentals

    Fundamentals consist of the basic qualitative and quantitative ...
  2. Forex Analysis

    Forex analysis describes the tools that traders use to determine ...
  3. Quantitative Analysis (QA)

    Quantitative analysis (QA) is a technique that seeks to understand ...
  4. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
  5. Value Investing

    Value investing is the strategy of selecting stocks that trade ...
  6. Horizontal Analysis

    Horizontal analysis is used in financial statement analysis to ...
Related Articles
  1. Investing

    Fundamental Analysis for Traders

    Find out how the fundamental analysis method can be applied strategically to increase profits.
  2. Investing

    What Are A Stock's "Fundamentals"?

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

    Fundamentals And Technicals: Together At Last

    It's a big mistake for a fundamental investor to ignore technical analysis. Find out how to become chart smart.
  4. Trading

    The Fundamentals Of Forex Fundamentals

    Charting is not the only way to analyze the foreign-exchange market. Learn how to apply fundamental analysis to the economic indicators.
  5. Investing

    Blending Technical and Fundamental Analysis

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

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
RELATED FAQS
  1. How do I take qualitative factors into consideration when using fundamental analysis?

    Fundamental analysis is the method of analyzing companies based on factors that affect their intrinsic value. Find out how ... Read Answer >>
  2. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  3. What does the Efficient Market Hypothesis have to say about fundamental analysis?

    Find out what the efficient markets hypothesis has to say about fundamental analysis and how recent finance research has ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center