Definition of Fundamental Analysis in the Currency Market
The fundamental analysis, in accounting and finance, is the analysis of a company's financial statements (usually to analyze the company's assets, liabilities and profits), its authenticity, competitors and markets. It also addresses the overall state of the economy and factors including interest rates, production, profits, employment, GDP, housing, manufacturing, and management. There are two basic methods that can be used in such analysis: Bottom-up analysis and top-down analysis. These terms are used to distinguish such analysis from other types of investment analysis, such as quantitative and technical analysis.
Fundamental analysis is a method of analyzing the financial market in order to anticipate price movements
Fundamental analysis is performed on historical and current data, but with the aim of making more accurate financial forecasts. There are also many potential goals:
• Conducting an evaluation of the company’s shares and forecast potential price development.
• Making predictions about the performance of its business.
• Evaluating its management and making internal business decisions or calculating its credit risk.
• Identifying the intrinsic value of a stock.
The Two Analytical Models
There are two basic methods on which investors rely when the objective of the analysis is to determine the shares to be bought and at what price:
Fundamental analysis confirms that the market may price the securities incorrectly on the short term, but the "correct" price will eventually be reached. Profits can be achieved by buying wrongly priced securities and then waiting for the market to recognize the “mistake” and re-price the securities.
Technical Analysis Technical analysts look at trends and price levels and believe that trend changes confirm sentiment. Known charts patterns can be found due to investor's emotional responses to price movements. Technical analysts mainly assess historical trends and ranges to forecast future price movements.
Investors can use one or more of these complementary methods for stock selection. For example, many key technical investors use the fundamentals to identify entry and exit points. Likewise, a large proportion of technical investors use the fundamentals to restrict their potential stock shares to "good" companies.
The selection of stock analysis is determined by the investor’s belief in different models about “how the stock market works”. For illustrations of these models, see discussions on the effective market hypothesis, the random walk hypothesis, the capital asset pricing model, the federal reserve model of the equity valuation theory, the market-based valuation, and behavioural financing.
The fundamental analysis includes:
• Economic analysis
• Industry analysis
• Company analysis
The intrinsic value of the stock is determined based on these three analyses. This value is considered the true value of the stock. If the intrinsic value is above the market price, it is recommended to buy the stock. If it is equal to the market price, it is recommended to hold the stock, and If it is below the market price, one should sell the shares.
Fundamental analysis is used by different portfolio management forms.
Investors can also use fundamental analysis within different portfolio management methods.
Buying and investing investors believe that holding good business allows the investor assets to grow with the company. Fundamental analysis allows them to find "good" companies, reducing their risks and the possibility of eliminating them.
Valuable investors restrict their attention to undervalued companies, believing it is "difficult to fall out of the trench." The values they follow come from the fundamental analysis.
Managers may use fundamental analysis to properly evaluate “good” and “bad” companies.
Managers can also consider the economic cycle in determining whether conditions are “appropriate” to purchase the fundamentally appropriate companies.
The paradoxical investors see that "The market on the short-term is a voting machine, rather than a weight machine." Fundamental analysis allows the investor to make a decision about value, while ignoring market opinions.
Managers can use fundamental analysis to determine future growth rates to purchase expensive growth stocks.
Managers may include fundamental factors as well as technical factors in computer models (quantitative analysis).
Top-down and Bottom-up Approaches
Investors who use fundamental analysis can use either top-down or bottom-up approach.
The top-down investor begins his analysis of the global economy, including international and national economic indicators. This may include GDP growth rates, inflation, interest rates, exchange rates, productivity and energy prices. They then narrow their search to regional / industrial analysis of total sales, price levels, effects of competing products, foreign competition, and entry or exit from the industry. Only then will they improve their search for the best busines