Fundamental Analysis

Fundamental Analysis

Fundamental Analysis

General Theory

As mentioned in a previous article, technical analysis relies on the present and historical price and movement of a security as they are illustrated on a chart, in order to determine its strength and forecast its future movements. One of the other key forms of analysis employed by traders is fundamental analysis. Fundamental analysis scrutinises the intrinsic value of a security, rather than merely evaluating its current price or historical fluctuations. There are multiple different factors that must be considered while carrying out a fundamental analysis to accurately forecast a security’s future movement and value, and to evaluate its current strength. Every factor that may have an impact on a security’s value must be studied and analysed in an attempt to accurately predict its future fluctuation. Fundamental analysis allows investors and traders to interpret whether or not a security is over or undervalued, after acquiring a quantitative value of said security and placing it in contrast with its actual market value.

Micro and Macroeconomic Level

There are several different important components of fundamental analysis that must be considered while carrying out an analysis of a security. Anything that may influence a security’s market price must be well thought-out. These may be on a macroeconomic or microeconomic level. Examples of macroeconomic factors that may influence a security’s value include the state of industry or the broader economy in a much larger population, such as a nation or autonomous region, not simply the population directly associated with the security. As a result, fundamental analysts must study large-scale economic factors such as national employment rates, industry, economic outputs, and inflation, as well as smaller microeconomic factors.

These microeconomic factors include the current state of the company or whole economy in question, its management, and general financial situation. By combining all of these microeconomic and macroeconomic factors, a fundamental analyst aims to obtain a true value of the security which can then be compared and contrasted to the security’s current market value, in order to decide on whether or not it is worth investing in. Fundamental analysts will regularly examine a company’s balance sheets in order to access a clear summary of their financial situation. All of the data used by a fundamental analyst in order to evaluate a security’s strength is publically available and can be used to analyse all kinds of financial instruments, although it is primarily used in the investigation of stocks. Fundamental analysis can also be applied to Forex, as analysts investigate the factors that influence an entire currency’s performance and value.

Economic Indicators

There are multiple crucial indicators that a fundamental analyst will be on the lookout for while attempting to understand the true value of a security. These indicators, as stated, can be either macro or microeconomic. The economic performance and situation in any country is detailed in reports which are, in turn, studied by fundamental analysts. These economic indicators are released by governments or private organisations at previously established and scheduled times. They give traders an indication of how an economy is performing.

Perhaps the most important economic indicator available to a fundamental analyst is Gross Domestic Product, commonly referred to as GDP. GDP serves as the most generalised representation of a country’s economic situation. It provides investors and traders with a figure that represents the overall market value of every single product and service produced by a country. If a particular security fluctuates at a similar rate to a nation’s economic performance, it allows fundamental analysts to have general understanding of its strength, due to its close links to the country it is associated with.

As well as GDP, fundamental analysts concerned with macroeconomic factors can analyse Consumer Price Index (CPI), retail sales, and industrial production. Consumer Price Index illustrates the price fluctuations of goods in a specific country in several hundred various categories. A fundamental analyst can gain an understanding of whether or not a country is earning money through production and distribution of goods and services by directly contrasting their CPI to their exports. In order to carry out a successful fundamental analysis, traders must consider and investigate these macroeconomic factors, then combine their findings with microeconomic factors specific to this financial instrument.

How to use fundamental analysis?

When the findings of these two separate analyses are completed and reviewed, the analyst is presented with an apparently true representation of the security’s market value, in contrast to its actual market value at that given time. When the analyst then compares the actual value to the value they acquired from their analysis, they are able to decide whether the security is being over or undervalued on the market. As well as this, this method can be used to gauge a company’s overall value and future potential. This is done by analysing a company’s profitability with regards to shareholders’ investments, their overall revenue, their margins of profit and other similar data.

If a security is viewed as undervalued, investors can expect it to soon rise to a market price that more accurately reflects its true value. Following fundamental analysis, if an investor believes a security as undervalued it may be a very beneficial security to invest in, as it is expected to experience an imminent rise in market price. Conversely, if a security is seen to be overvalued following a thorough fundamental analysis it is expected to decline in value in the near future. As a result, overvalued securities are clearly not a good buy. This illustrates a significant benefit of fundamental analysis as investors and traders are presented with clear illustrations of a security’s true market price, which does not necessarily correlate with what its current market price is.


Our course can greatly assist you as you learn trading fundamental analysis of currency, stock, commodity and cryptocurrency markets, providing you with clear and concise explanations of fundamental analysis, while also presenting real-life examples of the various applications of fundamental analysis. The knowledge you will acquire in this course will gift you with an ability to apply the principles of fundamental analysis to real life situations, helping you achieve maximum success while trading.