Fundamental analysis is considered the most universal and useful method for evaluating the market situation and forecasting its probable movements. It provides a great number of advantages to traders who use it. Besides, fundamental analysis comes in handy when it is needed to solve many versatile tasks. In this article, we are going to focus on the most important goals of this type of analysis. One of the main goals of fundamental analysis is to help traders prepare for unexpected price changes through understanding the reason why it is happening. Most often, market fluctuations are caused by external factors that affect quotes, e.g. economic, political, social, and seasonal factors. Constant and thorough study of these indicators enables investors to foresee possible future prices. It means that in order to make their own forecasts, speculators should know when important macroeconomic reports are due. When traders are aware of such events, they are better prepared for unexpected price movements. They learn to understand what may happen so that they can adjust their trading strategies quicker to ever changing market.
Another important goal of fundamental analysis is to determine whether a share is properly valued on an exchange. Nowadays, many market participants deem the stock market a unique place. In the equity market, they can sell something that costs $100 for $1,000 or buy something that is estimated at $100 for $10. Such price differences can be explained by the fact that the value of shares is determined by the principle of supply and demand. Of course, many other factors also have a huge impact, which is why prices sometimes differ significantly from the actual economic situation. Therefore, it is possible to buy shares at a price lower than the actual price. We are talking about the so-called intrinsic, real (or fair) cost.
The evaluation of shares with the help of fundamental analysis can be compared to an X-ray of a company. By applying this analysis, traders can study the internal financial condition of organizations and get conclusions about their wealth. It also protects potential investors from impulsive decisions, allowing them to soberly calculate possible risks and choose the most attractive options for investing capital. Besides, they can do this by learning a simple rule. If the intrinsic value of the stock exceeds the market price, such a share is considered undervalued and it is worth buying. If the intrinsic value is lower than the market price, the share is overvalued and it is recommended to sell it off.
Apart from the two mentioned goals, we can single out another goal of fundamental analysis. Perhaps this goal is mostly applied to large market players, yet it will not hurt to learn. This type of analysis enables investors to make a competent selection of issuing companies, explore their development prospects and assess the real cost of capital. It is quite useful for big players who consider a merger or acquisition of a company. Fundamental analysis helps them make an informed decision about stepping into the business of a particular company.
Importantly, the study of individual enterprises is always preceded by a close study of the general state of the economy and a specific industry. Only then will analysts follow the general-to-specific pattern. The analysis of companies is the most complex and time-consuming activity. The subject of analysis here is usually the financial statements of the enterprise for the last 3-5 years.
As a rule, potential shareholders usually assess the following indicators:
company's business model;
competitiveness;
economic performance;
management effectiveness;
operation in certain sector;
company's financial state.
The study also takes into account the company's market share, capital, profit, and other data that help determine the value and potential of the company. All the necessary figures and facts can be found in the company's financial documents: in the profit and loss statements, cash flow statements, and balance sheet.
Undoubtedly, fundamental analysis is an ideal tool for long-term investors. It allows them to evaluate the company from different angles, to find out its weak and strong points as well as sort out fundamentally strong and weak companies. As a result, traders have more chances to create an investment portfolio with profitable assets. Of course, the priority for traders is the shares of enterprises that have a stable financial position and opportunities for growth. They should also pay attention to the most undervalued financial instruments that have the highest growth potential in the long term.
Another important goal of fundamental analysis is to determine whether a share is properly valued on an exchange. Nowadays, many market participants deem the stock market a unique place. In the equity market, they can sell something that costs $100 for $1,000 or buy something that is estimated at $100 for $10. Such price differences can be explained by the fact that the value of shares is determined by the principle of supply and demand. Of course, many other factors also have a huge impact, which is why prices sometimes differ significantly from the actual economic situation. Therefore, it is possible to buy shares at a price lower than the actual price. We are talking about the so-called intrinsic, real (or fair) cost.
The evaluation of shares with the help of fundamental analysis can be compared to an X-ray of a company. By applying this analysis, traders can study the internal financial condition of organizations and get conclusions about their wealth. It also protects potential investors from impulsive decisions, allowing them to soberly calculate possible risks and choose the most attractive options for investing capital. Besides, they can do this by learning a simple rule. If the intrinsic value of the stock exceeds the market price, such a share is considered undervalued and it is worth buying. If the intrinsic value is lower than the market price, the share is overvalued and it is recommended to sell it off.
Apart from the two mentioned goals, we can single out another goal of fundamental analysis. Perhaps this goal is mostly applied to large market players, yet it will not hurt to learn. This type of analysis enables investors to make a competent selection of issuing companies, explore their development prospects and assess the real cost of capital. It is quite useful for big players who consider a merger or acquisition of a company. Fundamental analysis helps them make an informed decision about stepping into the business of a particular company.
Importantly, the study of individual enterprises is always preceded by a close study of the general state of the economy and a specific industry. Only then will analysts follow the general-to-specific pattern. The analysis of companies is the most complex and time-consuming activity. The subject of analysis here is usually the financial statements of the enterprise for the last 3-5 years.
As a rule, potential shareholders usually assess the following indicators:
company's business model;
competitiveness;
economic performance;
management effectiveness;
operation in certain sector;
company's financial state.
The study also takes into account the company's market share, capital, profit, and other data that help determine the value and potential of the company. All the necessary figures and facts can be found in the company's financial documents: in the profit and loss statements, cash flow statements, and balance sheet.
Undoubtedly, fundamental analysis is an ideal tool for long-term investors. It allows them to evaluate the company from different angles, to find out its weak and strong points as well as sort out fundamentally strong and weak companies. As a result, traders have more chances to create an investment portfolio with profitable assets. Of course, the priority for traders is the shares of enterprises that have a stable financial position and opportunities for growth. They should also pay attention to the most undervalued financial instruments that have the highest growth potential in the long term.
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