Basics of Fundamental Analysis
In technical analysis, we analyse historical data to make future predictions, while in fundamental analysis, we predict intrinsic value (fair market value) by analysing historical data as well as economic trends, industry trends, financial performance of companies and various other external events.
A fundamental analyst thoroughly scrutinizes the financial statements of corporations, track macroeconomic and financial movements and then arrive at a number at which the company should be valued. Actually, under this method, we figure out whether the stock is overvalued or undervalued.
For instance, if the fair market value of the shares is lower than the market price, then the stock is undervalued and traders prefer to buy those shares.
Types of fundamental analysis
- Quantitative analysis
Under this analysis, the traders only consider numerical data like financial statements of companies, macroeconomic data, etc.
- Qualitative analysis
Under this analysis, the investors focus on the management of the company, leadership skills of the management, the brand value of the company and other similar factors.
Ways of doing fundamental analysis
- Top-down approach
Under this approach, investors first consider the macroeconomic factors and then go on analysing financial health of the specific company.
- Bottom-up approach
Under this approach, analysts focus on the effects of macroeconomic factors on various industries and companies.