Fundamental analysis

Family VI · Charts & indicators

Not to be confused with technical analysis, forex technical analysis indicators.

Fundamental analysis is a method of valuing an asset by examining the economic, financial and qualitative factors that are expected to determine its worth. It treats price as something that can diverge from value in the short run, and it seeks to estimate that value independently of the market's own quotation. The approach is used across equities, currencies, commodities and fixed income, though the specific factors examined differ by asset class.

What fundamental analysis examines

The inputs depend on the asset. For a company, they include revenue, earnings, margins, debt, cash flow and management quality. For a currency, they include interest rates, inflation, trade balances and central-bank policy. For a commodity, they include supply, inventories, production costs and demand growth.

Two broad branches are usually distinguished. Quantitative analysis works with reported numbers and ratios; qualitative analysis covers strategy, competitive position, regulation and management. Most practical work combines both.

Worked example: valuing a share

A simplified earnings-based estimate. The figures are illustrative.

The estimate is only as good as its inputs. A different growth assumption or multiple changes the result, and the market price may reflect information the analyst has not yet incorporated.

Limitations

Fundamental analysis cannot produce a single correct price. Valuations depend on assumptions about the future, and two analysts using the same data can reach different conclusions. Reported figures may also be revised, and accounting rules vary between jurisdictions.

Timing is a further constraint: an asset can remain mispriced for long periods, so a correct valuation does not imply a near-term price move. Many participants therefore use fundamental analysis to select what to hold and chart-based methods to decide when to act.

Often confused with

technical analysis

Technical analysis studies price charts and market statistics to forecast direction, whereas fundamental analysis appraises an asset from economic and financial data; the visible sign is that technical work uses price and volume charts, while fundamental work uses reports, statements and economic releases.

forex technical analysis indicators

Forex technical analysis indicators are chart-based tools such as moving averages or oscillators applied to currency pairs, whereas fundamental analysis of currencies weighs interest rates, inflation and trade flows; the visible sign is a plotted indicator on a price chart versus a table of economic data.

See also

• forex technical analysis indicators
• price action
• support and resistance
• technical analysis
• fibonacci
• candlestick